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FxWirePro: Robust EUR/JPY hedging sentiments for bearish risks on ECB and EU PMIs hint – Deploy Delta Instruments

After the ECB yesterday highlighted growing downside risks to the EU economy, today’s manufacturing and services PMIs will provide further evidence on whether underlying growth momentum continues to soften. Last month, the manufacturing and services PMIs fell to 51.8 and 53.4, respectively. Both these outturns were the weakest for more than two years. For December we look for further, albeit small, declines to 51.6 and 53.3, while the consensus forecasts are for no change.

Hedging skewness: Please be noted that the positively skewed IVs of 2m tenors are signifying the hedging interests for the bearish risks. The bids for OTM puts of these tenors signal that the underlying spot FX likely to break below 126 levels so that OTM instruments would expire in-the-money. 

Risk reversals: Most importantly, to substantiate the above indications, negative risk reversal numbers of all euro crosses except EURGBP (especially EURJPY) across all tenors are also substantiating bearish risks in the long run amid minor abrupt upswings in the short-term. IVs for 2w tenors are on lower side which is interpreted as conducive for put option writers, and 2m IVs are on higher side which is good for the put holders.

Overall OTC barometer is noteworthy size in the forex options market that can stimulate on the underlying forex spot rate. 

Options Trade Tips (EURJPY): Buy 2m EURJPY (1%) ITM -0.69 delta puts for aggressive bears on hedging grounds. If expiry is not near, 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, saxobank

Currency Strength Index: FxWirePro's hourly EUR spot index is flashing at -79 levels (which is bearish), while hourly JPY spot index was at 24 (mildly bullish) while articulating at (10:36 GMT).

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex

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2019-01-23 15:02:27
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