GBP directly proportional, yen weaker on industrial numbers; deploy call ratio spreads for hedging

Japanese tertiary industry index MoM basis has contracted to -0.7% from previous-0.2%.

Japanese industrial production has also not been a good recovery, it printed at -2.1% which is in line with the forecasts, this slight negligible recovery can't be determined as significant factor to impact positively on its currency.

While capacity utilization has been worsened at -3.0 from previous -0.4%, this has been deemed as inefficient substance for industrial growth and it stimulates inflationary pressures.

On the flip side, it has been closely monitored the GBP's fluctuations and its fundamentals and it seems the uptrend on GBPJPY is intact and but we also reiterate any necked positions are not advisable at this juncture as the flurry of data events on GBP side underway for tomorrow. Keeping all these fundamental factors in mind we formulated this currency strategy.

Option Strategy: Call ratio spread (GBP/JPY)

Overview: Sideways or slightly bullish

GBPJPY is also moving in the same direction on sensitive global geopolitical factors. We therefore recommend "call ratio spread" as the pair is likely to remain either sideways or slightly bullish in our view.

Buy a Call and sell more Calls at a higher strike price. Buying call spread in addition to selling more necked call options constitutes this hedging position. The portion should ideally be constructed in the ratio of 1:2 or 1:3 with short time for expiry is preferred.

Buying ATM or ITM calls and simultaneously sell more OTM calls of the same maturity would not only establish this strategy but also reduce the total hedging cost.

Breakeven will be at:  short strike price + difference in strike price + net credit.