NFP preview: City Index looking for a positive surprise

The September NFP report, scheduled for release on Friday 6th October at 1330 BST, is a tricky one to predict due to the disruption caused by the hurricanes in Florida and Texas last month. The market is looking for an extremely weak 80k, which factors in the effect of the hurricanes. We believe that consensus is too pessimistic, and our model is looking for a healthier reading of 171k.

Although we believe that September’s reading should be taken with a pinch of salt due to the anomalies caused by weather-related incidents, we are comfortable with our above-consensus reading due to two factors. Firstly, September’s ISM reports seemed unaffected by Harvey and Irma, with the manufacturing reading rising to its highest level since 2004. Secondly, initial jobless claims have been similarly unaffected, which makes us query why economists surveyed by Bloomberg are expecting the NFP data to be affected so sharply.

Why it’s worth watching USD/JPY

This increases the chances of a positive surprise from the NFP reading in our view, which should be good news for the USDJPY, which has a 75% positive correlation with the NFP. This means that if this pattern holds, and if NFPs do surprise to the upside, then USD/JPY tends to move higher with the NFP report 75% of the time.

USD/JPY is by far the most sensitive FX pair to the NFP reading. GBP/USD’s correlation comes in at 55%, which is a touch positive but considered fairly insignificant. After the sharp sell-off in sterling this week, mostly on the back of political uncertainty around Prime Minister Theresa May’s term in office, we believe that GBP could be even less sensitive to the September reading.

Interestingly, the euro and US stocks historically have no correlation of note when it comes to the NFP, thus, we believe that the bulk of movement will be in USD/JPY and this is the pair to watch tomorrow afternoon. Key levels to watch on the upside if we do get a positive surprise in the NFP include 113.30 – the high from earlier this week, ahead of 114.50, the high from mid-May and mid-July. Due to the reticence to push USD/JPY above 115.00, we would urge caution above 114.50. If we see a weaker NFP tomorrow, which would be bad news for USD/JPY, then 111.95 – the 200-day sma, ahead of 111.07 – the 100-day sma, are key support levels to watch.

NFP typically more volatility than City Index model

The chart below shows the actual NFP reading, blue line, and the City Index prediction, orange line. As you can see, there is some discrepancy between the two, however, the City Index model tends to predict smoother numbers, whereas the actual NFP reading can be volatile. While we expect a better than expected number, we cannot rule out the prospect of an outlier as the NFP report has a history of volatility. Thus, be ready for the unexpected.