Non Farm payroll explained

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Non Farm Payrolls explainedNonfarm payroll employment is an influential statistic and economic indicator released monthly by the United States Department of Labor as part of a comprehensive report on the state of the labor market.

The NFP report causes one of the consistently largest rate movements of any news announcement in the forex market. As a result, many analysts, traders, funds, investors and speculators anticipate the NFP number – and the directional movement it will cause. With so many different parties watching this report and interpreting it, even when the number comes in line with estimates it can cause large rate swings. Read on to find out how to trade this move without getting knocked out by the irrational volatility it can create.

It is a compiled name for goods-producing, construction and manufacturing companies. The Bureau of Labor Statistics releases preliminary data on the first Friday of every month at 8:30am EST. This news release creates a favorable environment for active traders in that it provides a near guarantee of a tradable move following the announcement. As with all aspects of trading, whether we make money on it is not assured. Approaching the trade from a logical standpoint based on how the market is reacting can provide us with more consistent results than simply anticipating the directional movement the event will cause. Nonfarm payroll is included in the monthly Employment Situation or informally the jobs report and affects the US dollar, the Foreign exchange market, the bond market, and the stock market.

The figure released is the change in nonfarm payrolls (NFP), compared to the previous month, and is usually between +10,000 and +250,000 during non-recessional times. The NFP number is meant to represent the number of jobs added or lost in the economy over the last month, not including jobs relating to the farming industry.

The NFP data has grown to be increasingly importance on account of the Federal Reserve’s QE policy closely tied into the US unemployment rate.

NFP and the Financial Markets

While the overall number of jobs added or lost in the economy is obviously an important current indicator of what the economic situation is, the report also includes several other pieces of data that can move financial markets:

  • What the unemployment rate is in the economy as a percentage of the overall workforce. This is an important part of the report as the amount of people out of work is a good indication of the overall health of the economy, and this is a number that is watched by the Fed as when it becomes low (generally anything below 5%) inflation is expected to start to creep up as businesses have to pay up to hire good workers and increase prices as a result.
  • What sectors the increase or decrease in jobs came from. This can give traders a heads up on which sectors of the economy may be primed for growth as companies in those sectors such as housing add jobs.
  • Average hourly earnings. This is an important component because if the same number of people are employed but are earning more or less money for that work, this has basically the same effect as if people had been added or subtracted from the labor force.
  • Revisions of previous nonfarm payrolls releases. An important component of the report which can move markets as traders re-price growth expectations based on the revision to the previous number.

NFP Trading Strategy

The NFP report generally affects all major currency pairs, but one of the favorites among traders is the GBP/USD and EUR/USD. Because the forex market is open 24 hours a day, all traders have the capability to trade the news event.

The logic behind the strategy is to wait for the market to digest the information’s significance. After the initial swings have occurred, and after market participants have had a bit of time to reflect on what the number means, we will enter a trade in the direction of the dominating momentum. We wait for a signal that indicates the market may have chosen a direction to take rates. This avoids getting in too early and decreases the probability of being whipsawed out of the market before the market has chosen a direction. Looking to the 1 hour charts for trading on longer time frames could provide the directional bias.

Recommended Brokers

While most brokers are ok to trade during NFP note that some brokers, especially in fine print do have strict restrictions against news trading. Liteforex being one of them. While you might have brokers that allow you to trade the news, slippage can be a big problem, with either your orders not being triggered or your stop or take profit levels being missed. We recommend a reputable broker such as LMAX Exchange who have consistently proved to offer one of the tightest spreads even during volatile news releases. Alternatively, trading options during NFP is also possible.

How to read the NFP indicator

Generally, when NFP is lower than expected traders will begin to sell the US dollar on the belief that it is weakening. The opposite is true for an unexpectedly high NFP. NFP is released at 8:30am EST on the first Friday of every month and tends to cause an average move of 124 pips in the EUR/USD. For example, an NFP announcement may read like this:

The upcoming NFP announcement is expected to be on 185K. If it will be more than 185K it is considered as positive thing for the USD. The Unemployment Rate that will be announced at the same time is expected to be at 8.8%, any number below 8.8% will be considered as a positive thing to the USD.

Based on the above it is clear that that USD may rise, hence traders who open trades prior to the announcement tend to profit a lot. However, the NFP is purely speculation until the moment the results are announced and there are good chances that the results might be positive or even negative. It is advisable to follow the general market sentiments to gain a closer perspective on the NFP announcements.

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