FxWirePro: A Run Through on GBP/JPY Technical, Macro and OTC Outlook – Put Reverse Spreads as Ideal Hedging Vehicles

GBPJPY has consistently been dipping from the recent peaks of 147.148 levels, but in recent past, showed minor gains to the current 145.568 levels while articulating. We’ve explicitly highlighted further bearish potential of this pair in the days to come in our technical section, please follow below weblink for more reading on the same:

https://www.econotimes.com/FxWirePro-GBP-JPY-hammers-boost-up-consolidation-phase--Trade-one-touch-calls-and-long-hedge-ahead-of-BoE-1426592

Fundamentally, as we continue to foresee the trade apprehensions ratchet up, the GBPJPY likely to prolong its bearish streaks amid minor spikes against the Japanese yen in a typical “risk off” move. These bearish sentiments are factored-in OTC markets.

The market sentiment seems to flip flop back and forth on a daily basis between a “Risk On” and a “Risk Off”. Reading Risk Sentiment is as simple as following the direction of the US Stock Market.

The major event in this week’s UK economic calendar is the BoE’s MPC meeting that is scheduled on this Thursday. While the political and economic backdrop remains momentarily constructive of sterling’s underperformance. Nevertheless, we continue to be short, using near-term upswings by unwinding the GBPJPY expression of the trade since this is currently in the money but has only less than a week to expiry and is close to the strike.

There is very little intrigue this time – having raised Bank Rate to 0.75% at the start of last month, policy makers will refrain from making further changes to current policy or their forward guidance. 

The recent economic data have been broadly consistent with the BoE’s updated economic projections published last month – although July’s CPI was a touch below its forecast – and so they will maintain their expectation that further policy tightening over the forecast horizon will be required in order to return inflation sustainably to the 2% target. 

Perhaps the most interesting detail about the meeting is that it will be the first one attended by newly appointed external member Jonathan Heskel, Professor of Economics at Imperial College London, who has replaced the hawkish Ian McCafferty on the MPC.

OTC outlook and Hedging Strategy: Please be noted that the positively skewed IVs of 2m tenors signify the hedgers’ interests to bid OTM put strikes upto 141 levels (refer above nutshell evidencing IV skews). 

Accordingly, put ratio back spreads couple of days ago were advocated, we would like to uphold the same strategy on hedging grounds.

Both the speculators and hedgers who are interested in bearish risks are advised to capitalize on any abrupt momentary price rallies and bidding theta shorts in short run, on the flip side, 2m skews to optimally utilize delta longs.

The execution: At spot reference: 145.568, short 2w (1%) OTM put option (position seems good even if the underlying spot goes either sideways or spikes mildly), simultaneously, go long in 2 lots of delta long in 2m ATM -0.49 delta put options. A move towards the ITM territory increases the Vega, Gamma and Delta which boosts premium. As you could observe spot GBPJPY keeps dipping, these delta longs would become in the money, while these derivatives instruments target further bearishness of this pair.

The fresh delta longs for long-term hedging, more number of longs comprising of ATM instruments and ITM shorts in short term would optimize the strategy by reducing the cost of hedging. Thereby, the above positions address both upswings in short run and bearish risks in long run by delta longs.

Currency Strength Index: FxWirePro's hourly GBP spot index is inching towards 126 levels (which is bullish), while hourly JPY spot index was at -97 (bearish) while articulating (at 08:37 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex