FxWirePro: Yen shrugs off PBoC’s devaluation mechanism, $/¥ long straddles for long term hedging

Technical Glance and Hedging Perspectives:

On weekly charts, swings are getting narrowed along with the oscillating indicators evidencing proportionate convergence with price fluctuations on either side. On weekly chart, slow stochastic approaching overbought zone but there is trace of %D line crossover, instead both red and blue line moving as straight line. The major trend has been uptrend but some serious bearish candles are puzzling.

We think in between all these macro level developments volatility in FX option markets is getting fueled up as the long lasting Greece matters came into a temporary resolution finally, and for now, since the focus shifted onto Fed. Chinese devaluation did not seem to impact much on Yen, one can make out that from last two days of yen's stability and gains yesterday, if you have to compare this with other Asian pairs then huge difference is seen. Hence, we believe Yen is waiting curiously to get benefitted from any outcome of the rate decision.

Deploy straddles using At-The-Money calls and puts in this dubious situation.

USD/JPY's long-term uptrend is persisting but because of bearish sensation we foresee non-directional trend is also puzzling around this pair on EOD charts. Since it should not damage the dollar gains we like to remain in safe zone and recommend buying a straddle as shown in the diagram using At-The-Money option contracts, thereby, one can benefit from certain returns even if the pair breaks out on either side in a long run.

Highest returns can be achieved when the spot exchange price of USDJPY is greater than strike price of long ATM call plus net initial debit or when spot USDJPY is less than the strike price of long ATM put minus net initial debit.