FxWirePro: EUR/JPY Bearish/Bullish Scenarios, Risk-Reversals, IV Skews and Options Strategies

Although EURJPY saw mild price rallies yesterday, weakness is quite visible below 7&21-DMAs. The trend for the day appears to be absolutely edgy (sideways), currently trading at 122.932 levels but with little weakness.

Bearish EURJPY Scenarios: 

1) The EU economy bottoms only very gradually, failing to reach 1.5% growth by mid-year, 

2) Trump threatens Euro car imports with tariffs following the 232 reports into the industry.

3) Further escalation in US-China trade conflict that deals collateral damage to the Euro economy.

4) The global investors’ risk aversion heightens significantly,

5) The US starts vehemently criticizing Japan’s trade surplus against the US.

6) Japan's economy further decelerates and speculations for the BoJ’s additional easing grows.

Bullish EURJPY Scenarios: 

1) The definitive resolution to US-China trade conflict; 

2) The prolonged robustness in CB demand for EUR, 

3) More mainstream centre-right Italian govt if there are early elections

4) The momentum in JPY selling flows related to outward portfolio investments and FDI strengthens.

Risk reversals Substantiate Skews (EURJPY): We could see some minor positive shifts in existing bearish risk reversal set-up of euro crosses (especially EURJPY and EURUSD) that indicates the long-term hedging sentiments across all tenors are still substantiating bearish risks amid minor abrupt upswings in the short-term. Please be noted that 3m IVs are overall OTC barometer is a noteworthy size in the forex options market that can stimulate the underlying forex spot rate.

Hedging skewness (EURJPY): Most importantly, to substantiate the above indications, please be noted that the positively skewed IVs of 3m tenors that are also signifying the hedging interests for the bearish risks. The bids for OTM puts of these tenors expect that the underlying spot FX likely to break below 120.50 levels so that OTM instruments would expire in-the-money. 

Options Trade Recommendation (EURJPY)We’ve advocated buying 3m EURJPY (1%) ITM -0.79 delta puts for aggressive bears on hedging grounds as the mild abrupt upswings were contemplated earlier. If the expiry is not near, the delta movement wouldn’t be 1-point increase with 1 pip in the underlying spot FX. Which means if the spot FX moves 1 pip, depending on the strike price of the option, the option would also move less than 1. Thereby, in the money put option with a very strong delta will move in tandem with the underlying. Source: Sentrix, JPM, and Saxobank

Currency Strength Index: FxWirePro's hourly EUR spot index is flashing at 14 levels (which is mildly bullish), while hourly JPY spot index was at -16 (mildly bearish) while articulating at (06:36 GMT).

For more details on the index, please refer below weblink:

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