FxWirePro: EUR/JPY seems deceptive, interim gains on eve of ECB's monetary policy meeting but buy RR, load up weights in longs to hedge

We think that the fear of broader global risks now appears to outweigh worries about further ECB and BoJ policy easing. 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 but by capitalizing on short term upswing, preferably via options ahead of the March and June ECB meetings, despite acknowledging the recent uptick in the implied volatility of Euro crosses (see nutshell).

Technically, our bearish view in long-term for EURJPY was encouraged by the break below 126.00, near the 2015 lows. Lack of upside traction following the January uptick points to further weakness in the coming weeks. After break out of support 126, we can understand the intensity of prevailing bearish trend as we recently saw a breach of channel support as well.

But for now, we are looking ahead for either sideways or a slight upswing towards 125.00 areas to open our targets near 122.00 and then lower towards 118.75.

Contemplating above technical reasoning and the implied volatility of ATM contracts for near month expiries of this the pair is at around 14.55% for 1W contracts which is second highest among G10 currency space, we eye on loading up with fresh longs for long term hedging, more number of longs comprising both ATM and OTM instruments ITM shorts in short term would optimise the strategy.

As the delta risk reversals increasing up progressively with negative numbers signify hedging sentiments are well equipped for downside risks over the period of time.

While current IVs of ATM contracts are at higher levels but likely to perceive on an average of 12% in long run would divulge pair's gain (see 1W-1Y ATM IVs).

Hence, considering Euro's implied volatility and OTC market sentiments we think more downside risks are still on the cards in long run, as result of deploying ATM delta instruments would be the answer for both speculation and hedging if you think speculation in potential uptrend in short terms is not possible as delta risk reversal suggested puts have been overpriced then use OTM puts that are available in cheaper premiums comparatively. But don't you dare to buck the trend and miss long opportunities in prevailing bear trend.