FxWirePro: Spotlight On EUR/JPY Drivers, OTC Indications And Hedging Strategy

EURJPY bears have constantly been nudging prices for the last 5 consecutive days below 121 amid the highly volatile trading sessions for the day.

EUR is slightly weaker to start the week to trade below the 123 mark amid scant domestic drivers for the currency which remains supported by economic re-openings in the continent, the ECB’s expanded QE, and an easing of (now distant) euro breakup fears over a lack of cooperation on an EU relief package. 

Today’s reading for April Eurozone industrial production has posted a disappointing number again to confirm a big fall in activity similar to that seen in the UK. Already released data for the four largest economies all showed large falls in output (-17.1%), which is unsurprising considering that lockdowns were in place throughout the month. Industrial Production In the Euro Area decreased 28 percent in April of 2020 over the same month in the previous year. 

BoJ is scheduled for their monetary policy, Eurozone CPI and German ZEW Economic Sentiment scheduled for the next week.

Ahead of the above-stated macroeconomic events, at spot reference: 121.34 levels, we uphold 3m EURJPY (1%) ITM -0.79 delta puts for aggressive bears on hedging as well as trading grounds as the mild abrupt upswings were contemplated earlier. 

Rationale: The positively skewed EURJPY IVs of 2m tenors are signifying the bearish risks in the underlying spot (refer 1st exhibit). The bids for OTM puts indicates that the hedgers expect the underlying spot FX to show further dips so that OTM instruments would expire in-the-money (bids up to 117 levels). 

To substantiate the above indications, we could see fresh negative bids in the EURJPY bearish risk reversal (RR) set-up that indicates the long-term hedging sentiments for longer tenors that are still substantiating mounting bearish risks (refer 2nd exhibit). Courtesy: Sentry & Saxo