FxWirePro: Be prudent of mounting EUR/JPY OTC hedging sentiments ahead of ECB - Deploy customized options strategies

Yesterday ECB President Mario Draghi opened the annual ECB conference in Sintra, Portugal and will speak again this morning as the first speaker at this conference. His infamous speech delivered in Sintra last year is likely to be fresh in many people’s memory.

At the time his optimistic view on the eurozone economy was interpreted as a signal for an imminent end of the ultra-expansionary monetary policy. As a result, the euro appreciated significantly. One year on things looks a little different though.

Last week the ECB really did announce the end of the asset purchases, but an actual end of the expansionary monetary policy is not really in sight. Rate hikes, which are what the market really wants to see, are still a long way off, as the ECB has pointed out very clearly. It can therefore not be assumed that Draghi will move the markets to the same extent today as he did last year.

Bearish EURJPY scenarios (see 126) if:

1) The Growth fails to rebound above 2%

2) EUR appreciation and/or sluggish core CPI delays ECB policy normalization

3) The BoJ does not move even if core inflation rate rises more than expected.  

OTC outlook:

Most importantly, please be noted that the positively skewed IVs of 3m tenors are signifying the hedging interests in the bearish risks. The bids for OTM puts of these tenors signal that the underlying spot FX likely to break below 123 levels so that OTM instruments would expire in-the-money.

While mounting negative risk reversal numbers of 3m tenors are also substantiating bearish risks in long run amid minor abrupt upswings in the short-term.

Technically, we already raised red flags about EURJPY bearish risks. For more readings, refer below website: https://www.econotimes.com/FxWirePro-EUR-JPY-bears-win-trades-in-tussle-between-hammer-and-shooting-star--Trade-one-touch-puts-and-short-hedge-on-bearish-engulfing-1375673

Options strategies for hedging:

Contemplating above fundamental driving forces and OTC indications, we’ve devised various options strategies:

Buy 2M EUR puts/JPY calls vs. sell 2M 28D EUR puts/KRW calls for directional traders.

Buy 2m EURJPY ATM -0.49 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.

Sell 4M EURJPY 25D risk-reversal (buy EUR calls - sell EUR puts), delta-hedged for risk-averse traders.

Currency Strength Index: FxWirePro's hourly EUR spot index is flashing at -92 levels (which is bearish), while hourly JPY spot index was at 99 (bullish) while articulating at (09:33 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex

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