FxWirePro: Uphold hedging vehicles prioritizing on EUR/JPY OTC bids than PPP and FEER sentiments

We articulated a high conviction, constructive view for EUR predicated on the robust cyclical lift in the region and the unwinding of distortions to capital flows and EUR valuation from the unconventional monetary policy.

We also stated that EURJPY PPP and FEER valuations are the yen bear’s arch-enemies, but they apply far more to the USDJPY than to the EURJPY, given that the euro, too, is significantly undervalued on a PPP basis. The PIIE puts a FEER-consistent EURJPY rate at 121. More important perhaps than the valuations, however, is our confidence that the ECB is further along the road to policy normalization than the BOJ.

While please be noted that the bearish neutral risk reversals are still indicating bearish risks in longer tenors, while positively skewed IVs of the 3m-1y tenors signify the hedgers’ interests in OTM put strikes. These skews signal underlying spot FX to drop below 126 levels. While glance through above nutshell evidencing risk reversals, although these numbers have been neutral, we can understand the highest hedging sentiments for bearish risks of this pair among G10 FX space. Bearish hedging remains intact.

To substantiate this standpoint, if you observe the technical chart of this pair, the major trend has been rising higher upto 61.8% Fibonacci levels from the lows of 109.205 levels but with struggling momentum. The technical momentum indicators have been substantiating overbought pressures in this consolidation phase (refer monthly chart). For more reading, refer our technical section.

Hence, keeping the both OTC and technical factors in mind, it is advisable to initiate below relative value trades.

Sell 6M EURJPY 25D risk-reversal (buy EUR calls - sell EUR puts), delta-hedged for risk-averse traders.

Buy 3M EUR puts/JPY calls vs. sell 3M 28D EUR puts/KRW calls for directional traders.

Buy 3m EURJPY ATM -0.49 delta puts for aggressive bears on hedging grounds.

Currency Strength Index: FxWirePro's hourly EUR spot index is inching towards 40 levels (which is bullish ahead of the data announcements of German and Spanish CPI prints followed by M3 money supply) while articulating (at 06:55 GMT), while hourly JPY spot index was at 138 (highly bullish). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex.

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