FxWirePro: Sterling bulls to intensify on hawkish BoE - GBP/JPY OTC outlook and hedging strategy

Following on from last week’s ‘hawkish’ comments from Bank of England policymakers we now expect a UK rate hike of 0.25% to be announced after the next Monetary Policy Committee meeting on November 2nd. The minutes of the September meeting and subsequent comments by MPC members suggest that there is now widespread support on the committee for a rise.

The Japanese yen fell modestly possibly due in part to expectations of a snap general election. Sterling is sitting close to recent highs ahead of Wednesday’s retail sales data and Friday’s speech on Brexit from PM May.

Please be noted that the positively skewed IVs of GBPJPY of 1m tenors signify the hedgers’ interests in OTM put strikes. While IVs of these tenors are spiking above 11.70% which is highest among G7 currency space.

The higher IVs with well-adjusted positive skewness signify the hedgers’ interest for both OTM call/put strikes. In usual circumstances, long option position needs higher IVs for significant change in vega. Hence, we capitalize on buzzing IVs and improve odds on options below strategy.

With this interpretation, one can judge whether the options with a higher IV cost more. This is intuitive due to the higher likelihood of the market ‘swinging’ in your favor. If IV increases and you are holding an option, this is good.

Thus, we advocate weighing up above aspects as we eye on loading up with fresh vega longs for long-term hedging, more number of longs comprising of ATM instruments and deep OTM call shorts with narrowed tenors would optimize the strategy.

The aggressive volatility investors want to capture GBP should consider buying ATM put instruments and/or being long of the smile convexity, against ATM volatility.

Further GBPJPY upswings and/or abrupt weakness suggest building a directional strategies and volatility patterns at the same time.

Contemplating IV skewness and ongoing technical uptrend in the consolidation phase, we foresee the value of OTM options would likely rise significantly as the IVs seem to be favoring long legs of ATM strikes.

Currency Strength Index: Ahead of the announcement of the UK retail sales numbers and BoJ’s monetary policies, FxWirePro's hourly GBP spot index is flashing at 81 levels (bullish), while hourly JPY spot index was at shy above -106 (bearish) at 08:04 GMT, these indies values are also in sync with our above technical rationale. For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex.

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