Forex Trading Guide: U.S. NFP Report (September)

Lo and behold, forex comrades! Another NFP Friday approaches beyond the horizon! Why not prepare yourself for battle by reading up on this edition of my Forex Trading Guide?

I’m assuming, of course, that a U.S. government shutdown will be averted.

What is this report all about?

The NFP report gives a detailed snapshot on the current state of the U.S. labor market. It is of great importance to forex traders because the health of the labor market has a very significant spill-over effect on the rest of the economy. Specifically, a healhy labor market means more jobs and higher wages, which usually translates to higher consumer confidence and consumer spending. And the latter two help to power the U.S. economy. In fact, consumer spending contributed 2.42% to Q2 2015’s 3.9% GDP growth. That’s a mighty large chunk right there.

Also, the NFP report has recently become even more important because employment levels, together with long-run inflation expectations, is closely linked to the U.S. Fed’s timing of a highly-anticipated rate hike.

What happened last time?

The employment situation for August was mixed bag of nuts since both the average hourly earnings (0.3% actual v.s. 0.2% expected, 0.2% previous) and the jobless rate (5.1% actual v.s 5.2% expected, 5.3% previous) were both surprisingly a bit better-than-expected. But at the same time, non-farm employment change was only 173K, which is significantly lower than the expected 215K net employment increase and the 12-month average of around 247K. The reading for the previous month was upgraded from 215K to 245K, though, so it wasn’t all that bad. The labor force participation rate, meanwhile, remained unchanged at 62.6%.

Digging around the report, it looks like the civilian labor force declined from 157,106K to 157,065K, which helps to explain why the jobless rate decreased even though the employment gain was lower-than-expected and the participation rate was essentially unchanged. Basically, it was a matter of proportion, with the slower job increase being offset by the lower civilian labor force.

What’s expected this time?

For September, economists and forex traders are expecting the jobs data to be another mixed bag of nuts since the average hourly earnings is expected tick lower to 0.2% from 0.3% while the consensus for non-farm employment change is a 202K increase, which is a healthy improvement when compared to August’s 173K. As for the jobless rate, it’s expected to remain steady at 5.1%.

I don’t know if the actual readings will meet the market’s expectations, though, since Markit’s September manufacturing PMI for the U.S. reported that there was an increase in payroll numbers, but it was “only marginal and the weakest since July 2014.” Also, Markit’s September flash services PMI for the U.S. indicated that “payroll numbers increased at the slowest pace for three months.” On the other hand, ADP’s non-farm employment change posted a better-than-expected increase of 200K (192K expected), but it slightly downgraded the previous reading from 190K to 186K.

How might the Greenback react?

The last time around, the knee-jerk reaction to the mixed readings was a violent 15-minute tug-of-war between the bulls and the bears. The forex bulls ultimately had their way, probably because more forex traders were expecting a disappointing reading for non-farm employment change. After all, ADP’s August report printed a disappointing actual reading of only 190K job gains (204K expected, 177K previous) just a couple of days before. There was little follow-through, however. In fact, forex traders began taking profits off the table, probably because they wanted to avoid the long weekend due to the Labor Day holiday.

USD Index 15-minute Forex Chart

For the upcoming event, the readings are expected to be mixed again, but we probably won’t be seeing another tug-of-war since the market has probably priced-in the expected readings already. As an initial or knee-jerk reaction, we can probably expect forex traders to load up on Greenback if the readings come in better-than-expected, and we can probably expect forex traders to dump the Greenback should the opposite hold true.