How to trade NFP, one of the most volatile events

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. The release rocks financial markets for a long time, generally impacting the prices of stocks, Gold, the US Dollar (USD) and many other assets. 

This makes it one of the best chances for traders to make a profit, albeit carrying its own set of risks.  

Do NFP data provide opportunities for traders?

Yes, plenty. 

Nonfarm Payrolls are a critical indicator of the economic health of the United States, which is the world’s largest economy. 

Trading around an NFP release is volatile and can be risky because almost all assets tend to move sharply in a matter of minutes, sometimes seconds. While some traders prefer to remain on the sidelines during the event, others find opportunities amid these market swings.

Several hours after the data is released, markets close for the week. Therefore, traders – especially those in the large financial hub of London – have little time to react to the data. This fact adds to the rush and the high volatility.

Gold price (XAU/USD) fell sharply on October 4 within the first 30 minutes after the NFP release, when the data beat estimates. However, traders quickly turned around afterward and Gold recovered its pre-NFP-release price around two hours later.

How to trade NFP?

The data comes along with many other indicators. When trading, it is essential to know that the first impact belongs to the headline Nonfarm Payrolls figure – the change in the number of jobs. It is expressed in thousands, and it can be positive or negative. 

A positive print means that the US economy created new jobs over the month, while a negative one means that employers on average shed jobs.

A few days before the publication of the data, dozens of economists and analysts present their estimates of how many jobs they think the US economy created (or destroyed) over the month, forming a consensus. 

Any significant deviation from this consensus – how far or close to the actual figure is from what was expected – usually becomes the main factor moving markets.

It is difficult to predict how will markets react, but generally NFP data that comes above the consensus tends to push shares of US stocks higher as it can imply higher company profits going forward. 

However, the context is also important: when interest rates are rising, investors fear that a strong economy will mean even higher rates. In such a case, stock prices may fall despite the economic strength that the indicator implies. 

As for the US Dollar, the reaction is mostly straightforward. A report showing a resilient labor market is generally bullish for the USD as it means a strong economy. On the contrary, a weak report means a softer economy, weighing on the Greenback.

The valuation of the DXY US Dollar Index, which measures the value of the US Dollar against a basket of foreign currencies, surged on October 4 within the following hour after the NFP release. This happened after the data beat estimates in almost all of its components.

However, the US economy leads the world and the US Dollar is the world's reserve currency. 

That makes the US Dollar's reaction different in times of crisis. If the US economy is struggling, it means other places are doing even worse. A weak NFP report causes people to flee to the safety of the US Dollar. In other words, when things are bad, the US Dollar can also gain.

For Gold, a NFP report that shows a higher-than-expected increase in jobs tends to lead to price declines. On the contrary, a downside surprise – meaning that the economy has created fewer jobs than expected or has even destroyed jobs – supports price increases for the yellow metal. 

Apart from the headline NFP, which data do I need to look at?  

The headline NFP data is included in the so-called Employment Report. 

This includes plenty of other statistics to which traders also pay attention. While the Nonfarm Payrolls change causes the first big reaction in markets, the nuances that bring other indicators need to be taken into account once the dust settles as these could even fully unwind the first reaction. 

Two more components worth watching. The first one is Average Hourly Earnings, particularly when inflation is high,  as these reflect changes in salaries. 

When people make more money, higher inflation tends to follow. 

When pay falls, price rises tend to moderate. 

The second component worth examining is the Unemployment Rate. When markets are worried about an economic recession – when the economy doesn’t grow –, they check out every change in the jobless rate because a quick increase in the Unemployment Rate is an early sign of a recession.

And that’s not all. 

In some cases, the NFP report for the current month includes significant revisions for previous months. While markets are focused on the most recent figures, significant upward revisions make the report look better and considerable downward revisions make the response worse.

On October 4, almost all components of the US employment report beat economists’ expectations (green), and the previous months’ data was upwardly revised. Markets took the report as a very strong one.

Is there any reasonable strategy to trade NFP data for October?

The FXStreet economic calendar points to an increase of 113,000 jobs, way below the 254,000 that were created in September. There are three scenarios depending on the outcome:

1) Within expectations (113K-140K, Unemployment Rate stable at 4.1%)

An as-expected Nonfarm Payrolls report would allow Gold to extend its bullish run, albeit gradually. Stocks would edge up on a "Goldilocks" scenario of a strong economy and falling interest rates. The US Dollar (USD) would remain stable.

2) Above expectations (140K or more, Unemployment Rate down to 4% or lower)

Initial reaction: A better-than-expected jobs report would hurt Gold, as it means higher interest rates. Stocks would rise, as a robust economy is positive for company profits, while interest rates are set to fall in any case. The US Dollar would rise on prospects of a higher path of interest rates. 

Second reaction: Once the dust settles, markets may look at the political implications ahead of the US presidential election. Such figures would help Vice President Kamala Harris, but not enough for a Democratic sweep, which has low chances anyway. Still, lower chances of a Donald Trump victory mean no new big tariffs, which means a lower path for interest rates. That is bullish for Stocks and Gold, and bearish for the US Dollar. 

3) Below expectations (Less than 113K, Unemployment Rate up to 4.2% or higher)

Initial reaction: A terrible jobs report would send Gold up as it means lower rates. It would weigh on the US Dollar, and hurt Stocks on worsening prospects for the US economy. 

Second reaction: Such a disappointment has political implications, increasing the chance Republicans win a clean sweep. That means that while would enact tariffs, his party would push for big tax cuts. Prospects of a "red wave" are bullish for stocks and Gold. The drop of the US Dollar would stall due to expectations of higher rates, a result of an increase in inflation. 

FXStreet covers Nonfarm Payrolls live, providing insights about all the components and their impact in each and every release.