Kenny Fisher forex analystKENNY FISHER
PROFILE:

- Current Job: Analyst at Forex Crunch
- Career: Graduated from law school in Toronto. Former account manager at Bendix. Senior writer at Forex Crunch.

Introduction

This article discusses trading FX based on the Non-Farm Payrolls. It is a given that there is an element of risk in trading FX. However, an understanding of some basic concepts about major economic indicators, such as the Non-Farm Payrolls report, can minimize some of that risk.

Background

Financial markets in the US, Europe and around the world react, often sharply, to global economic events. These events can also have a significant impact on the currency markets, so it is important for currency traders to monitor the release of major economic indicators, such as US Non-Farm Payrolls (NFP). This indicator is also referred to as US Non-Farm Employment Change.

 

NonFarm Payroll

Definition: measures the number of jobs added or lost in the US economy over the last month.

Publication: released usually on the first Friday of each month, at 8:30 EST. It is published by the US Department of Labor.

Significance: considered the most important employment indicator. It provides a look at the health of the US economy in general, and the labor market in particular.

How NFP affects the US Dollar

As one of the most important economic indicators, the NFP release can have a major impact on the forex markets and can affect the direction of the US dollar. This means that traders should always treat the NFP report as market-moving data.

A NFP which is stronger than the estimate (also known as the forecast) indicates that the labor market is stronger than what the markets expected, and the dollar often rises as a result. Why? Let's use a stock market analogy to answer this question. Just like a company's stock often rises after the company releases a strong financial report, so to the US dollar can be thought of as the "stock of the US economy". Thus, when the US releases a strong economic report, the "stock" (US dollar) often rises against other currencies (such as the euro, pound or yen) as a result.

Conversely, a weak NFP report indicates that the labor market is weaker than what the markets anticipated, and a weak reading can push the dollar lower against other currencies.

 

TIP: Mark your economic calendar so that you can monitor the release time of NFP.


non farm payrolls economic calendar

The chart above, taken from the FXStreet Economic Calendar, provides the estimates and actual readings for the June 2015 and May 2015 NFP reports.

Each report covers the employment change measured in the previous month. The June report, released on June 5, covers the employment change measured in May. Similarly, the May report, released on May 8, covers the employment change measured in April.

The chart shows the following:

June reading: actual release: 280 thousand
                               estimate: 222 thousand

May reading: actual release: 223 thousand
                               estimate: 224 thousand

 

D. Effect of NFP release on the markets

When trading based on economic events, it's always a good idea to be well-versed with that particular sector of the economy. So, for trading based on the NFP, a trader should have a solid understanding of employment conditions in the US. The more knowledge you have, the more confident you will feel trading the NFP. Don't accept the market estimates as written in stone; they are often well off the mark. Ask yourself if you think the NFP will improve or lose ground in the next release. If, for example, you feel that the NFP may move higher, then there's a strong chance that the US dollar will move higher following the release (we'll explain why shortly).

 

TIP: Keep current on financial news, especially on the US labor market and employment conditions. This will help you trade the NFP. 

 

Trading before release of NFP

The period immediately before the NFP release is when market uncertainty is at its highest “ will the reading move higher or lower compared to last month? This uncertainty can lead to volatility in the forex markets, as traders and investors anxiously await the release. Trading during this time carries additional risk, as the markets do not have any solid data to work with prior to the release. Nonetheless, the volatility often seen prior to a major event does present trading opportunities.
 

Trading after release of NFP

We noted earlier that the NFP is a major economic indicator, and that there is a strong likelihood that the currency markets will move after the NFP is released. Will the US dollar move up or down? That of course, is the million dollar question which nobody can predict, but we can use a general rule to help us make an educated guess:


NFP is higher than the estimate >> dollar will likely move higher

NFP is lower than the estimate >> dollar will likely move lower



However, this rule is not absolute, and another factor that we need to keep in mind is the previous release (one month earlier). If NFP showed a higher gain in the current reading compared to the previous reading, but fell short of the estimate, the dollar could still rise because the indicator improved in actual numbers, despite falling short of the estimate.
There is of course, the possibility that the markets will not show much movement at all following a major release like NFP. This could happen if the actual reading is close to the estimate. However, if the reading is significantly higher or lower than the estimate, there is a strong chance that the dollar will respond with some movement.
 

Duration of NFP release on markets

Economic indicators like NFP are considered short-term market movers. This means that the dollar often reacts immediately after the indicator is released, but in some cases, the NFP reading can affect the markets for up to 2 or 3 days. This means that market volatility is most likely right after the release of NFP, but the markets can experience volatility well after the actual release time.
 

TIP: If there is volatility after the NFP release, it is likely to be at its strongest in the first few hours after the release.


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Editors’ Picks

EUR/USD stuck in familiar territory ahead of NFP Friday

EUR/USD stuck in familiar territory ahead of NFP Friday

EUR/USD trimmed further into the bearish side on Thursday, falling back a scant but persistent sixth of a percent and keeping bids nailed to the 1.0300 handle as the pair churns near 26-month lows. 

EUR/USD News
GBP/USD taps new 14-month low as NFP watch begins

GBP/USD taps new 14-month low as NFP watch begins

GBP/USD tapped a fresh 14-month low on Thursday as the Pound Sterling rolls over further against the Greenback. Holiday-thinned markets are keeping one foot firmly in the safe haven US Dollar as investors await a fresh round of US Nonfarm Payrolls data on Friday.

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USD/JPY bulls take a breather above 158.00 ahead of US NFP

USD/JPY bulls take a breather above 158.00 ahead of US NFP

USD/JPY takes a breather above 158.00 following the release of household spending data from Japan, slightly off the multi-month top amid wavering BoJ rate hike expectations. However, the widening of the US-Japan yield differential keeps the pair supported amid a bullish US Dollar. US NFP data awaited. 

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Editors’ Picks

AUD/USD side-lines near 0.6200 as traders await US NFP report

AUD/USD side-lines near 0.6200 as traders await US NFP report

AUD/USD consolidates near 0.6200 early Friday, just above its lowest level since October 2022 as traders move to the sidelines ahead of Friday's closely-watched US NFP data releae. Meanwhile, rising bets for an early RBA rate cut, China's economic woes and US-Sino trade war fears act as a headwind for the Aussie. 

AUD/USD News
USD/JPY bulls take a breather above 158.00 ahead of US NFP

USD/JPY bulls take a breather above 158.00 ahead of US NFP

USD/JPY takes a breather above 158.00 following the release of household spending data from Japan, slightly off the multi-month top amid wavering BoJ rate hike expectations. However, the widening of the US-Japan yield differential keeps the pair supported amid a bullish US Dollar. US NFP data awaited. 

USD/JPY News
Gold price consolidates below multi-week top; looks to US NFP for fresh impetus

Gold price consolidates below multi-week top; looks to US NFP for fresh impetus

Gold price enters a bullish consolidation phase below a four-week top touched at $2,678 on Thursday as bulls await the US NFP report before placing fresh bets. In the meantime, geopolitical risks, trade war fears and a weaker risk tone might continue to act as a tailwind for the safe-haven XAU/USD. 

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Ripple's XRP declined 4% on Friday following a decline in its funding rates. The remittance-based token could decline to test the $2.17 support level if the crypto market decline extends.

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How to trade NFP, one of the most volatile events

How to trade NFP, one of the most volatile events Premium

NFP is the acronym for Nonfarm Payrolls, arguably the most important economic data release in the world. The indicator, which provides a comprehensive snapshot of the health of the US labor market, is typically published on the first Friday of each month.

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