FxWirePro: GBP/JPY IVs highest among G10 FX pool ahead of BoE and BoJ monetary policies – Bid 2m skews and hedge

While last week was dominated by politically-orientated risks, this week is set to be driven by central banks, most significantly the Federal Reserve (Tue/Wed). Since their last meeting, US policymakers have softened their tone, triggering financial market participants to scale back their interest rate expectations markedly. A rate hike is still discounted for this week but the market’s probability on the likelihood of at least 25bps of tightening in 2019 has declined to around 50% (from close to 90%), the chance assigned to 50bps has fallen to around 18% (from 65%). 

Elsewhere, the Bank of England, Bank of Japan and Riksbank (all Thu) are expected to leave their respective policy rates unchanged.

Ahead of these central bank meetings, a limited data and events calendar today will provide little immediate distraction. 

OTC outlook and Hedging Strategy: Please be noted that IVs of this pair that display the highest number among entire G10 FX universe (spiking above 13.52%).

While the positively skewed IVs of 2m tenors signify the hedgers’ interests to bid OTM put strikes upto 139 levels (refer above nutshells evidencing IV skews). 

Accordingly, diagonalput ratio back spreads (PRBS)are advocated on the hedging grounds. Both the speculators and hedgers who are interested in bearish risks are advised to capitalize on current abrupt and momentary price rallies and bidding theta shorts in short run, on the flip side, 2m skews to optimally utilize delta longs.

The execution: Capitalizing on any minor upswings , we advocate shorting2w (1%) OTM put option (position seems good even if the underlying spot goes either sideways or spikes mildly), simultaneously, go long in 2 lots of delta long in 2m ATM -0.49 delta put options. 

The rationale for PRBS: Well, the traders tend to perceive these trades as a bear strategy, because it deploys more puts. But actually, it is a volatility strategy.

Hence, entering the position when implied volatility is high and anticipating for the inevitable adjustment is a wise thing, regardless of the direction of price movement. Based on volatility and time decay, the strategy is a “price neutral” approach to options, and one that makes a lot of sense.

As you could observe spot GBPJPY keeps dipping, these delta longs would become in the money, while these derivatives instruments target further bearishness of this pair. Courtesy: sentrix

Currency Strength Index: FxWirePro's hourly GBP spot index is flashing 132 (which is bullish), while hourly JPY spot index was at 68 (bullish) while articulating (at 11:53 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex