FxWirePro: Euroarea remains quite on German PPIs, Euro crosses edgy ahead of PMIs – Bid 3m EUR/JPY RRs and skews and hedge

A quiet day for euro area economic data saw the release this morning of German PPI figures for October, which continued to illustrate disinflationary pressures down the price pipeline. In particular, producer prices fell for the fourth month out of the past six, to leave the annual PPI rate down 0.5ppt to -0.6%Y/Y, the steepest drop for more than three years. Of course, this principally reflected a further fall in energy prices, down 1.2ppts to -3.1%Y/Y, the steepest decline for three years. In contrast, consumer non-durable price inflation rose ½ppt to 2.3%Y/Y, the strongest rate for almost two years. Nevertheless, with prices of intermediate goods still falling and capital goods little changed, the core PPI rate moderated further at the start of Q4, to just 0.3%Y/Y, indicating that underlying price pressures are effectively non-existent. 

Euroarea PMI data is scheduled for the next week, the data indicates the economic health and businesses react quickly to market conditions, and their purchasing managers hold perhaps the most current and relevant insight into the company's view of the economy.

Euro crosses have been weaker today, especially, EURJPY that shows slumps of -0.27% from yesterday. Technically, the pair’s downtrend resumes on the failure swings at channel resistance, RSI shows faded strength but stochastic & MACD still mildly bullish bias. We could foresee the retest of 117 levels again in the weeks to come.

OTC outlook: Please be noted that the positively skewed IVs of 3m tenors that are also signifying the hedging interests for the bearish risks. The bids for OTM puts expect that the underlying spot FX likely to show further dips so that OTM instruments would expire in-the-money (bids upto 117.50 levels). 

Most importantly, to substantiate the above indications, we could see some minor positive shifts in existing bearish risk reversal (RR) set-up of EURJPY that indicates the long-term hedging sentiments across all tenors are still substantiating bearish risks amid minor abrupt upswings in the short-term. Please be noted that 3m negative RRs suggest the overall OTC hedging sentiments for the further bearish risks. Hence, we advocate below hedging strategy contemplating the current OTC indications.

Options Strategy: Contemplating above factors, we’ve advocated buying 3m EURJPY (1%) ITM -0.79 delta puts for aggressive bears on hedging grounds as the mild abrupt upswings were contemplated earlier. 

Short hedge: Alternatively, we advocated shorts in futures contracts of mid-month tenors with a view to arresting potential dips. since further price dips are foreseen we would like to uphold the same strategy by rolling over these contracts for December month deliveries ahead of Euroarea PMIs. Source: Sentrix, Daiwa & Saxobank