As the delta risk reversals of this pair indicates bearish neutral sentiments in FX OTC markets as there is no hedging interest seen in near terms (see for 1W expiries) but this has again shown in favour of bearish interests as the progressive increase in negative numbers signify the traction for hedging sentiments for downside risks in both short and long term.

You can observe the reducing hedging interest as current IVs of ATM contracts are collapsing below 9.5%, shrunk away after recent central bank policies from both euro and JPY sides, but it is likely to perceive at an average of 10.5% in long run that would divulge hedging traction (see 3M-1Y ATM IVs).

Since risk reversal is in bearish neutral, any abrupt upswings could be capitalized to build in shorts with shorter expiries and delta long instruments for hedging downside risks have been favoured by acknowledging the stabilized implied volatility in 3M tenors.

Given concerns on limits of the policy arsenal at the BoJ and rising euro-centric risks, we recommend initiating short EURJPY positions for long term hedging.

Technically, our bearish view in long-term for EURJPY was again encouraged by not sustaining at 7DMA and the break out of supports at 126 often and often, we can understand the intensity of prevailing bearish trend as we recently saw a breach of channel support as well.

As result, deploying as many ATM delta instruments as possible would serve the ideal hedging objectives (as per L.T. risk reversal indication), this would be used to measure the value of an option as the market moves. This is useful to monitor directional risk so you may know how much your option’s value will increase or diminish as the underlying spot FX market moves.