Macro view on Japanese central bank and Yen: The Bank of Japan (BoJ) maintained its QQE policy of raising the monetary base by JPY80tn on an annual basis and of continuing to apply its negative rate of -0.1% to the current account (policy-rate balance), while the market may continue to expect additional QQE.

There is a risk that the market may once again perceive limits to the effectiveness of monetary policy if additional QQE were to be implemented.

Before the BoJ implemented QQE with negative interest rates, the market thought that there was a limit to the effects of monetary policy.

Bank of Japan Governor Haruhiko Kuroda probably hopes this concern has now been removed thanks to the introduction of the negative interest rate policy.

The BoJ’s negative rate policy was probably the right decision, as without the move JPY could be much stronger.

Evidently, we’ve seen almost more than 15% drop in USDJPY in last 9 months, and more than 18.5% drop in EURJPY in 17 months, while GBPJPY slumps over 20% in just 11 months.

Technically, the recent bounces in GBPJPY from second week of this month above 7DMA have now faced major resistance at 162.702 and rejected at this level. Currently, bulls are testing a support at 156.853 levels where the pair has remained in demand zone in the recent past, which is near current 21DMA flashes, if it breaks below we could foresee bears resuming to evidence further dips.

GBP/JPY OTC FX Observation and Hedging Strategy:

Please have a glance on how implied volatilities of ATM puts of 3W and 1M expiries are acting crazily in OTC markets, 13.74% and 13.08% respectively ahead of UK’s manufacturing, construction & service PMIs and Japan’s manufacturing PMI scheduled in next week, and thereafter manufacturing output & inflation report followed by BoE’s monetary policy are lined in mid May.

So, it’s reckoned that these medium term volatilities are majorly owing to PMIs and BoE's governor speech.

Officials are still expected to stand pat on the benchmark interest rate a record low 0.5% in coming month as well considering the fears of Brexit pressures.

Subsequently, what is weighing on the pound's slumps is that, the expectations on BoE’s unlikely changes, above all lingering Brexit probabilities add an extra pressure on sterling's depreciation.

Hence, we advocate the suitable strategy to hedge these downside risks by using these small bounces from then to help our ITM shorts, this would have certainly ensured returns in the form of premiums. 

So, stay firm with longs on 2 lots of 1M At-The-Money Vega puts that would function effectively in considerably higher IV times (see sensitivity table for higher probabilities and stabilized Vega growth). Simultaneously, deploy shorts side of 1 lot of 1W (0.5%) ITM put option.