Trading the Non-Farm Payrolls: relevance, impact, tips and techniques
Besides our monthly report on the event, in this series of articles several of our dedicate contributors help us explaining its importance and impact on the FX trading. We also get from them valuable insights and tips to trade before and after the event.
Trade the Nonfarm Payrolls
Why is the NFP so relevant?
Wayne McDonell, Chief Currency Coach at FxBootcamp, gives a precise answer to the question in the first paragraphs of his article How To Prepare For and Trade the Employment Situation Report:
“This report is important because the US is the largest economy in the world and its currency (USD) is the global reserve currency. The many economies peg (tie) their currency's value to the reserve currency, many commodities such as gold and oil are priced in terms of the reserve currency and the local economy's debt is priced in terms of its own currency.
The Non-Farm Payroll report, because of its importance to the reserve currency, tends to move all markets: currencies, equities, treasuries, interest rates, and commodities. It does so immediately after the release of the economic data and sometimes dramatically.
A lot more skeptical on the benefits of trading the event, as you can read in its article Step aside the Non-Farm Payrolls release, Adrián Aquaro, President at Trader College, says its importance has decreased a little bit lately:
“Even if the impact has diminished gradually over time, the US Non-Farm Payroll still generates huge attention on the markets and it normally drives important monthly trends. Lately another event (the Fed Monetary Policy Meetings) has been driving similar attention, thanks mainly to the Interest Rates being at 0%.
Still, there is no denying to the impact of the data on the markets.
How does the NFP impact the USD?
The answer to this question can begin with a simple analogy. Better employment numbers (more payrolls added), good for the USD; worse numbers, bad for the buck. Kenny Fisher, Analyst at Forex Crunch, expands on that in his Tips on How to trade the Non-Farm Payrolls:
“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.
But there's much more to this question.
TIP
Kenny Fisher: “Keep current on financial news, especially on the US labor market and employment conditions. This will help you trade the NFP.
Measuring the impact that macroeconomic data such as the number of payrolls or the rate of unemployed people has on the markets is difficult and complex. Several methods, strategies and tips can be used. Our contributors share some of them in their reports:
Before the NFP release
The hours that precede the release of the employment report may be decisive. Kenny Fisher bewares us of the “high uncertainty", which “can lead to volatility in the forex markets, as traders and investors anxiously await the release". But, nonetheless, Fisher thinks that “the volatility often seen prior to a major event does present trading opportunities".
Trying to profit on that, Wayne McDonell sets up a technical range strategy (read it in his full article) before the release of the NFP data. In his words: “The goal is to overlap the average daily range with solid levels of support or resistance".
McDonell also does some modeling on related macroeconomical data to elaborate its fundamental analysis. Those include averages of past headline NFP numbers or Weekly Jobless Claims, ISM Industry Data reports or other employment reports as the ADP or the Challenger. That is key on the preparation of the trades to set up just after the release.
In contrast, Adrián Aquaro doesn't believe in trading before or after the event. He argues that “banks and press already known the information when released and therefore any trader has a disadvantage". Aquaro also defines the market moves in the minutes that follow the release as “completely unpredictable to individual traders".
Viktor Eperjesy, Head of Business Development at Trade Proofer, is an expert in gathering information on the brokers' spreads, something every retail trader must take very carefully into account.
In his article, Eperjesy warns us about the divergence between “target spreads listed by brokers" and the actual spreads applied during a high volatility event as the Non-Farm Payroll. In his words:
“As we all know, forex brokers' information sheets listing "target spreads" are not something traders can rely on when they trade around important economic events, like non-farm payrolls. During these minutes spreads first fall apart and recover slowly afterwards as market calms down."
This evolution is way more explained with this very explicit graphic:
After the NFP release
The minutes just after the release tend to show big moves in the prices of the majors, but the volatility usually continues for several hours. Kenny Fisher believes in trading not only the actual release against the expectations, but also against the previous figure. Fisher sticks to the basics: “If NFP is higher than the estimate and/or the previous the dollar will likely move higher, but if lower, it will go down".
TIP
Wayne McDonell: “Trade the revision number. It is common to see 30% revisions. Especially on months when the headline number is “as expected", pay close attention the revised number. The market often trades that new information instead".
In a more advanced analysis, Wayne McDonell proposes another strategy for scalpers, those traders willing take quick trades and profit from short-term swings. This “continuation strategy", fully explained here, tries to trade “in the direction of the initial reaction to the news by the market".
Besides, McDonell also argues against “straddling the market" with “options style" strategies. FX Bootscamp's trading coach believes there are several problems with this, such as potential whipsaws, wide spreads and slippage.
Final tip
As you may note, our experts have different point of views, techniques and feelings towards the Non-Farm Payrolls release. There isn't one only way to approach it. The strategy to trade (or not) the release every trader should take is finally something to their choice. We hope these different views shared here can help you to take your own one and succesfully manage your accounts when trading this very highly volatile macroeconomic event.
Author
Jordi Martínez
FXStreet
Jordi Martínez is the Editor in Chief at FXStreet, leading editorial operations at the company, before being promoted to the role in 2023, he worked in several editorial positions at FXStreet, including roles as Senior Editor and
