Trading the Non-Farm Payroll

Christopher Lewis

The monthly US Non-Farm Payrolls (NFP) data release is without a doubt one of the biggest, high-impact recurring events in the Forex market, along with the monthly FOMC statement and projections. The NFP can sometimes move the Forex market significantly, meaning that an informed Forex trader can sometimes exploit the announcement to extract profit from the market. In this article I will explain when that can happen, which currencies are most affected by the NFP and why, and what trading strategy you might best use to exploit such an event.

What is the NFP?

The US non-farm payrolls data is simply the number of net new jobs created in the US economy over the past month – excepting farm workers, as farm employment is highly seasonal. The announcement typically happens on the first Friday of every calendar month. As the United States is the world’s biggest economy, the jobs report can have a major influence on risk appetite globally. The data can also give clues as to the health of various sectors of the economy, pressures on monetary policy, future interest rates and inflation, so analysis of this data point can go deeper than you might expect at first sight.

How the NFP Influences Markets

With the United States consuming 24% of the world’s energy, the non-farm payroll announcement can also have major implications when it comes to demand for crude oil or natural gas. It also can have a major influence on currencies that are highly correlated to energy, such as the Norwegian krone or the Canadian dollar. Beyond that, the United States is also a huge importer of goods, so it stands to reason that demand in the US labor market will have a major influence on other countries around the world that are exporting to the US.

Depending on the overall macroeconomic situation, a stronger than anticipated number of jobs added during the previous month can be detrimental to the US dollar, because there will be more demand for imported goods. As an example, if there are more workers on the road, the idea is that consumption of crude oil will more than likely pick up. In that scenario, you may see the Canadian dollar strengthen. Beyond that, you could look at the idea of emerging markets starting to see strength in their currencies, as a healthy United States typically means a healthy global economy, as demand for goods coming out of places like China, Indonesia, and Vietnam pick up.

The non-farm payrolls announcement can be tricky to interpret because it must be looked at through the prism of what the market is most focused on at the time.

There are other times when the entire global economy is dragging along, but we see the United States adding jobs as being beneficial for the US Dollar, mainly because it is where all the growth is. In other words, there is no absolute and the best way to describe whether the NFP is a tradable event is: “it depends.”

Analyzing NFP Data

Analyzing NFP numbers is not necessarily difficult, but you need to pay close attention to the expected number as a comparison point with the actual number, as well as any revised numbers. The data almost always gets revised a month or two later, because the accounting of the announcement includes a lot of assumed figures, which are almost always incorrect. That being the case, it is very rare that a revised number moves the market, unless of course it is far stronger or weaker than anticipated.

There are many calendars you can check online that will give you the projected number for the upcoming non-farm payroll data release. It should also be noted that the NFP release includes other minor data points such as hourly earnings that are also looked at by traders, but typically it is the “headline number” of jobs gained or lost that any subsequent market move will be based upon. It is at this point that you need to better understand fundamental vs technical analysis, because the market may or may not care about the job situation, depending on what else is going on.

By reading central bank speeches and releases, you can get a feel for whether the market is expecting a central bank to tighten or loosen its monetary policy, and that of course applies to the US Federal Reserve. In a situation where a tightening of monetary policy may be on the table, a stronger than anticipated NFP jobs number could very well drive up the value of the US Dollar as traders anticipate that the Federal Reserve will either taper bond buyback programs, or possibly even raise interest rates. On the other hand, if that same scenario presents itself but the numbers are much less than anticipated, you will quite often see other currencies benefit. You need to understand what the central banks are focusing on currently, by keeping current with their public statements which are released from time to time.

Which Forex Currency Pairs are Most Affected by the NFP?

Countries that trade heavily with the United States tend to be more affected by the NFP than those which do not, as the NFP in Forex can dictate monetary flow going forward. Commodity currencies tend to be relatively sensitive to the NFP data, because of the crude oil and other commodity demands that could come from a strong labor force in the United States. It is worth pointing out that sometimes the United States and Canada both release their labor data at the same time, and in this scenario, the USD/CAD pair will probably be worth avoiding as there will be a lot of crosswinds.

Regarding which currency pairs to use in trading the NFP in Forex, the USD/JPY pair tends to have a lot of volatility around this announcement, mainly because this pair typically trades on the 10-year note yield differential between the two countries. Obviously, as interest rate expectations go higher or lower, this has a major influence on the bond markets, and therefore has a major influence on pairs that are highly sensitive to those very same bond markets, such as the USD/JPY currency pair. The Euro and the British pound both are sensitive as well, but this is probably more of a “knock on effect” from what happens with the US Dollar overall, and maybe not specifically with the European Union or the United Kingdom. Check out the USD/JPY price chart below to see how difficult trading the NFP release can be at times. In the highlighted area, you can see the price suddenly went higher upon the NFP release, only to lose the momentum later.

Typical Volatility Following NFP Release

Typical Volatility Following NFP Release

NFP Trading Strategy

If you are going to trade the NFP release in the Forex market, there are two templates you could consider using as the basis for an NFP trading strategy. One strategy will be more successful when the NFP release quickly produces a directional price movement which is sustained for most or all the rest of the day – let’s call this the NFP breakout trading strategy. The second strategy will be more successful when the NFP release produces an initial, short-lived directional price movement which then reverses – let’s call this the NFP reversal trading strategy. Until the mid-2010s, you would probably have had more success with the NFP breakout strategy, but since then the NFP reversal strategy would have performed better.

The NFP breakout strategy works by waiting for one candlestick to complete following the announcement, from 5 minutes to 30 minutes depending upon preference. You then place a long entry order one pip beyond the high of the candlestick and a short entry order one pip below the low of the candlestick and cancel the other order as soon as one trade is triggered. Stop losses can be placed the other side of the candlestick or maybe a bit further away. The idea behind this strategy is to get you involved in the main breakout move once the immediate post-release noise has died down.

The NFP reversal strategy is a bit more complicated. After the release, you wait for up to an hour for the initial post announcement price move to play out and reverse. You enter just after the reversal forms in the direction of the reversal and take partial profit when the price gets back to where it was just before the release, or when the weekly trading session ends, whichever comes first. The stop loss should be placed just the other side of the reversal candlestick pattern.

Be warned that spreads can be wide, and the price can be very jumpy, just after the NFP release. This can make trading difficult, even once a few minutes have passed following the announcement.

Bottom Line

How to best trade the NFP release can be a very difficult question, and the answer can change from month to month. Therefore, beginner traders are best served by simply observing these announcements for a while and learning to understand what the market is looking at on different occasions. In recent years, we have seen that the NFP announcements typically cause a lot of noise, but not necessarily a lot of sustained price movement. As the world emerges from the coronavirus pandemic, most central banks are maneuvering to tighten monetary policy. In that scenario, it does make sense that a strong jobs market points towards the US Dollar strengthening due to tightening monetary policy. However, under normal circumstances the exact opposite could also be true because of the demand equation concerning foreign goods imported into the US for consumption and business use.

You also need to understand the other central banks that you are gauging the US Dollar against. For example, the Bank of Canada will pay close attention to oil prices, so that could strengthen the Loonie if the jobs number is strong, all other things being equal. The same thing could be said for the Euro, as Americans will be buying more European goods as imports. However, if one of those central banks is in the process of loosening monetary policy, those currencies may not be able to take advantage of the NFP number. It is all about relativism, which makes the NFP data release unlikely to be suitable as part of a Forex trading strategy for beginners.

FAQs

How does the NFP affect Forex?

The Non-Farm Payroll announcement has a major influence on the US Dollar, which by extension has a ripple effect through the Forex markets. After all, over 80% of all Forex transactions around the world are made in US Dollars, as it is the world’s reserve currency. Extrapolating that further, if you can get the value of the US Dollar correct, you can quite often use that to your advantage to trading multiple pairs.

How do I trade the NFP in Forex?

This depends on whether the market is trying to price in central bank action, and therefore you need to understand whether a strong or weak number will move the central bank. As we have seen in recent years, the Federal Reserve tends to take a series of announcements, not just one, to make a monetary policy decision. It is not so much one NFP number that you should be paying attention to in that scenario, but the recent series of them and most importantly, the overall trend.

How does the NFP affect gold?

The NFP announcement has an influence on gold via the bond markets. When interest rates rise, most of the time traders are willing to take on paper in the form of bonds instead of paying massive amounts of storage fees for gold. You must think like a large fund, who will be buying massive amounts of metal or bonds every time they get involved in the market. It does cause quite a bit to store gold, while storing bonds is practically free. The question is whether the interest rate being paid on the bond makes it an attractive investment. This usually comes down to the “real rate of return.” If you can make a guaranteed rate of return above inflation by holding a piece of paper, then it becomes a very valuable asset, pulling away a lot of the perceived value in buying gold. Furthermore, this can often boost demand for the US Dollar as those bonds are priced in US Dollars just like gold. In other words, a stronger US Dollar means that it will take less of those dollars to buy gold. Obviously, the exact opposite can also be the case, as very low yields can make the idea of owning gold worthwhile.

Christopher Lewis

Christopher Lewis has been trading Forex for several years. He writes about Forex for many online publications, including his own site, aptly named The Trader Guy.

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