KENNY 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.
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.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Editors’ Picks
EUR/USD posts modest gains near 1.1650 amid Fed rate cut bets
The EUR/USD pair posts modest gains around 1.1645 during the early Asian session on Monday. The prospect of a US Federal Reserve rate cut at its December meeting on Wednesday could weigh on the US Dollar against the Euro. Later on Monday, the German Industrial Production and Eurozone Sentix Investor Confidence reports will be published.
GBP/USD consolidates around 1.3330 as traders await Fed rate decision
The GBP/USD pair kicks off the new week on a subdued note and oscillates in a narrow trading band, around the 1.3320-1.3325 region, during the Asian session. Spot prices, however, remain close to the highest level since October 22, touched last Thursday, with bulls awaiting a sustained strength and acceptance above the 100-day Simple Moving Average before placing fresh bets.
USD/JPY holds losses around 155.00 as Japanese Yen recovers
USD/JPY keeps the red near 155.00 in Asian trading on Monday. The Japanese Yen stages a minor recovery, helped by a cautious mood amid Japan-China geopolitical tensions and the expectations of Fed-BoJ monetary policy divergence. The pair also faces headwinds from a broadly weaker US Dollar.
Editors’ Picks
AUD/USD inches higher to near 0.6650 after China's Exports surge
AUD/USD is picking up small bids to test 0.6650 in the Asian session on Monday. The pair capitalizes on upbeat China's Trade data for November, which showed a solid growth in the country's Exports, easing concerns over the world's second-largest economy. The Aussie also remains supported ahead of Tuesday's RBA policy verdict.
USD/JPY holds losses around 155.00 as Japanese Yen recovers
USD/JPY keeps the red near 155.00 in Asian trading on Monday. The Japanese Yen stages a minor recovery, helped by a cautious mood amid Japan-China geopolitical tensions and the expectations of Fed-BoJ monetary policy divergence. The pair also faces headwinds from a broadly weaker US Dollar.
Gold continues its struggles with $4,200 as the Fed week kicks in
Gold treads water around $4,200 early Monday, while within the previous week’s trading range. US Dollar holds lower ground amid looming Fed rate cut call and a cautious mood. Gold’s daily technical setup suggests that buyers are not ready to give up yet.
Top Crypto Losers: Monero extends losses below $370 as Aster and Bonk risk record lows
Altcoins, including Monero, Aster, and Bonk, are at risk of extending their losses as the broader cryptocurrency market stalls amid the dragging peace talks between Ukraine and Russia.
The Silver disconnection is real
Silver just hit a new all-time high. Neither did gold, nor mining stocks. They all reversed on an intraday basis, but silver’s move to new highs makes it still bullish overall, while the almost complete reversals in gold and miners make the latter technically bearish.
RECOMMENDED LESSONS
Making money in forex is easy if you know how the bankers trade!
I’m often mystified in my educational forex articles why so many traders struggle to make consistent money out of forex trading. The answer has more to do with what they don’t know than what they do know. After working in investment banks for 20 years many of which were as a Chief trader its second knowledge how to extract cash out of the market.
5 Forex News Events You Need To Know
In the fast moving world of currency markets where huge moves can seemingly come from nowhere, it is extremely important for new traders to learn about the various economic indicators and forex news events and releases that shape the markets. Indeed, quickly getting a handle on which data to look out for, what it means, and how to trade it can see new traders quickly become far more profitable and sets up the road to long term success.
Top 10 Chart Patterns Every Trader Should Know
Chart patterns are one of the most effective trading tools for a trader. They are pure price-action, and form on the basis of underlying buying and selling pressure. Chart patterns have a proven track-record, and traders use them to identify continuation or reversal signals, to open positions and identify price targets.
7 Ways to Avoid Forex Scams
The forex industry is recently seeing more and more scams. Here are 7 ways to avoid losing your money in such scams: Forex scams are becoming frequent. Michael Greenberg reports on luxurious expenses, including a submarine bought from the money taken from forex traders. Here’s another report of a forex fraud. So, how can we avoid falling in such forex scams?
What Are the 10 Fatal Mistakes Traders Make
Trading is exciting. Trading is hard. Trading is extremely hard. Some say that it takes more than 10,000 hours to master. Others believe that trading is the way to quick riches. They might be both wrong. What is important to know that no matter how experienced you are, mistakes will be part of the trading process.
The challenge: Timing the market and trader psychology
Successful trading often comes down to timing – entering and exiting trades at the right moments. Yet timing the market is notoriously difficult, largely because human psychology can derail even the best plans. Two powerful emotions in particular – fear and greed – tend to drive trading decisions off course.