Inflation refrains BoJ to expand stimulus; GBP/JPY debit spreads may trend slightly up or sideways

Among G10 pool, sterling received a shot in the arm from hawkish BoE governor Carney, who had said that "the point at which interest rates may begin to rise is moving closer given the performance of the economy". But for now many economist estimates that the economy shrank 3.3%. Kuroda thinks that inflation would reach around 2% around six months through September 2016.

As a result GBP buying would be on upper hand for today if we get a further rise in average earnings for the three-month period through May (forecasts: 3.3% yoy). But for foreign traders are advised to safeguard their FX exposures through suitable hedging arrangements, we came up with some instances and recommended below strategy. The million dollar question for now arise - Is it good enough to keep our currency exposures in naked positions and confront Yen's uncertainty; this has certainly been a tough call. Therefore, call spread shall be used over naked calls.

Debit call spread = Long 15D ATM 0.52 delta call (193.615) + Sell 7D another 1.75% OTM call with lower Strike Price (Out of the Money = 197.004) with net delta should be at 0.41 as shown in the diagram. For a net debit call spread reduces the cost of hedge by the premium collected (¥333.99 on the shorts of OTM call).