FxWirePro: Bearish/Bullish Scenarios of USD/JPY, OTC indications and Options Strategy

Bearish USDJPY scenario to nudge towards 105 levels if: 

1) The global investors’ risk aversion heightens significantly, 

2) The markets further price in a possibility of the Fed’s rate cut, 

3) The US starts vehemently criticizing Japan’s trade surplus against the US and 

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

Bullish USDJPY scenarios to climb 120 if:

1) The acceleration in US inflation leads to aggressive Fed hikes and a spike in UST yields and 

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

USDJPY fell from 112.400 to the recent lows of 109.019 levels, the defensive yen has been the top performer of the day. We feel quite fortunate to be exiting in the black having owned USDJPY through a deep and sometimes volatile correction in US stocks. 

USDJPY OTC update and options strategy as follows: 

Most importantly, please be noted that the positively skewed IVs of 3m tenors are signifying the hedging interests for the bearish risks. The bids for OTM put of these tenors signal that the underlying spot FX likely to break below 107.500 levels so that OTM instruments would expire in-the-money. These positively skewed IVs indicate hedgers’ interests in OTM put strikes, overall, put holders are on the upper hand.

While mounting 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.

Accordingly, a couple of days ago the debit put spreads have been advocated, we would like to uphold the same strategy but with diagonal tenors on hedging grounds.

While both the speculators and hedgers for bearish risks are advised to capitalize on the prevailing price rallies and bidding theta shorts in short run and 3m risks reversals to optimally utilize delta longs.

At spot reference of USDJPY: 109.656 levels, we advocate buying a 3M/1m 111.50/107.50 put spread ahead of Fed and BoJ monetary policies in June, the US-Japan trade talk at the end of May and the global risk factors (the US-China trade war escalation, the US debt ceiling discussions) to materialize,(vols 6.8 vs 6.65 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. Courtesy: Sentrix, JPM & Saxobank

Currency Strength Index: FxWirePro's hourly JPY spot index is flashing at -32 levels (which is mildly bearish), while hourly USD spot index was at -26 (mildly bearish) while articulating at (10:15 GMT).

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