How Does Non-Farm Payroll (NFP) Affect Forex Trading

In the U.S., nonfarm payroll data is released every month on the first Friday. It is the most anticipated economic data releases as far as forex traders are concerned. The report causes extreme volatility in the market and often triggers a long-term upward or downward trend for the U.S. dollar. The aim of this article is to provide you with an inside look as to at what is it that the report entails and how you can benefit from the price movements in the currency market.

Importance of Nonfarm Payroll Data

How Does Non-Farm Payroll Affect Forex TradingThe nonfarm payroll represents the number of paid workers in any business in the U.S. It excludes private household employees, general government employees, farm employees, and nonprofit organization employees assisting individuals. This data provides some information about inflation and the economic growth rate.

The importance of this data arises from the fact that the U.S. is the world’s largest economy and U.S. dollar is considered as the reserve currency. Countries around the world peg the value of their currencies to that of the reserve currency. Many commodities like oil and gold are also priced at U.S. dollars.

The Nonfarm payroll report, therefore, often moves all of the financial markets, including forex, equities, interest rates, treasuries, and commodities. The impact often felt immediately after the announcement of the data. At times, it moves the market in a dramatic manner. Over time, the impact has reduced a little bit but the nonfarm payroll does generate a great deal of attention. This data generally creates important monthly trends.

Impact of Nonfarm Payroll Data on the U.S. Dollar

The impact of the nonfarm payroll report on the U.S. dollar is determined by the difference between anticipated figures and actual numbers reported by the Bureau of Labor Statistics. While better employment numbers or addition of more payrolls is always good for the U.S. dollar, not-so-encouraging numbers make the greenback weaker.

If the nonfarm payroll numbers are better than the analysts’ estimate or forecast, then it indicates that there is strength in the labor market. This also indicates that the American economy is growing. Further, the addition of jobs at a faster pace might cause the inflation to go up. Such a report helps the dollar to advance against other world currencies. In the stock market, the price of a company’s shares rises when the company reports a better than expected financial data. It is the same in the case of the U.S. dollar as well. When a strong economic report is released, the U.S. dollar gains against other currencies. On the other hand, a weak nonfarm payroll report indicates weakness in the U.S. labor market. This, in turn, puts pressure on the U.S. dollar and it weakens against other world currencies.

It is not easy to measure the impact of the nonfarm payrolls data or the unemployment rate on the currency market. Therefore, individuals employ several methods and strategies to use it to their advantage when trading currencies.

How To Analyze the Nonfarm Payroll Numbers

Now that you know the importance of the nonfarm payroll data and how it impacts the currency markets, it is time to learn to analyze the nonfarm payrolls numbers. According to experts, it is a good idea to look at some of the other important related economic reports prior to analyzing the nonfarm payroll survey report. This is because the reports provide you with clues on the nonfarm payroll report. They may not give a definitive idea but you may be able to some indications about what the nonfarm payroll numbers will be like. These reports are:

ISM Manufacturing Survey

This report includes an employment subcomponent. The ISM report does not provide any specific numbers but it does indicate the direction of movement of some companies. If the index is above 50, it symbolizes an increase in employment. A reading below 50 represents contraction.

ADP Employment Report

The ADP report is often released a few days prior to the announcement of the nonfarm payroll data and it provides insight into the employment trends in the private business sector. This report is widely considered as a predecessor to the government report.

Jobless Claims

The initial unemployment claims report is a weekly report and tracks claims filed for unemployment benefits. It provides a great deal of information about the conditions prevailing in the labor market in the U.S. This report does not have much of an impact on the forex markets, but it helps in macroeconomic analysis. However, one aspect you have to keep in mind is the 4-week moving average. This gives you some indications about the relationship between the current number recent trends.

Analysis of Nonfarm Payroll Data

The nonfarm payrolls data can be analyzed in three ways:

A better payroll data is good for the American economy as job additions contribute to a healthier and stronger economic growth. When consumers have a job and more money with them, they tend to spend more and this leads to overall growth. Therefore, investors and traders in the currency market look for an addition of a minimum of 100,000 jobs in a month. The U.S. dollar often gains whenever more than 200,000 jobs are added in a month. The same effect can be seen whenever the increase is more than that forecast by analysts.

The forex market experiences a mixed reaction if the payroll data matches with that of the market expectation. If the payroll report is as expected, you can look at the subcomponents and other items such as manufacturing payrolls and unemployment rate to understand the direction of price movement.

On the other hand, a lower job addition is not good for the American economy and the dollar. If the number of jobs added is less than 100,000 or is below the market expectation, then the price of the U.S. dollar declines with respect to other currencies.

Summarizing, employment is a hot topic as far as forex trading is concerned. This is because it provides indications as to whether the economy expanding or contracting. If you know why it is important and what its implications are, you will be much better off when trading currencies.

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