FxWirePro: Bearish/Bullish Scenarios of USD/JPY, OTC Update and Options Strategy Ahead of BoJ and Fed

Bearish USDJPY scenarios, see 104 if:

1) The trade tensions between the US and China/Mexico intensify and global investors’ risk aversion heightens significantly,

2) The markets further price in a possibility of Fed’s rate cut and 3) the US starts vehemently criticizing Japan’s trade surplus against the US.

Bullish USDJPY scenarios, see 115 if: 

1) The outlook of the US and global economies recovers and risk sentiments firm along with a spike in UST yields, 

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

USDJPY OTC update and options strategy as follows: 

Please be noted that the positively skewed IVs of 3m tenors are signifying the hedging interests for the bearish risks. We see bids for OTM strikes up to 106.50 levels. This indicates hedgers’ interests in OTM put strikes, overall, put holders are on the upper hand.

While negative risk reversal numbers of USDJPY across all tenors are also substantiating downside risks amid any momentary upswings in the short-run.

OTC positions of noteworthy size in the forex options market can stimulate the underlying forex spot rate. The spot may trend around OTM put strikes as the holders of the options will aggressively hedge the underlying delta.

Hence, at spot reference of USDJPY: 108.64 levels, we advocate buying a 2M/2w 109.732/106.50 put spread ahead of Fed and BoJ monetary policies (vols 6.61 vs 6,89 choice), wherein short leg is likely to function if the underlying spot FX keeps spiking, we would like to maintain the ITM long leg with the diagonal tenors on hedging grounds. The lower/shrinking implied volatility is good for options writer and increasing realized volatility is good for the bearish trend. Hence, the above strategy seems to be the best suitable in prevailing volatile conditions. Courtesy: JPM, Sentry & Saxo