THE SMART GUIDE TO TRADING NON-FARM PAYROLLS
The NFP report otherwise known as the Employment Situation Report takes an in-depth look at employment trends in the U.S
For many a trader, investor, and financial expert, every first Friday of the month is an essential day in the financial markets because the United States Bureau of Labor Statistics (BLS) releases the previous month’s Non-Farm Payroll Report (NFP).
The NFP report otherwise known as the Employment Situation Report takes an in-depth look at employment trends in the U.S with the headline data point being the Non-Farm payrolls number which measures how many net new jobs are added to the U.S. economy each month. In addition, the report contains the unemployment rate, which sectors are hiring or firing employees, the average number of hours worked, the average hourly earnings, and a few other key metrics of employment.
The NFP report is what is often referred to as a ‘Market Mover’ given that it often causes the financial market to become volatile based on its outcome. Because it influences the economy to a large extent, the NFP has a major impact on both the forex and stock markets.
Why is the NFP report so important?
The report provides fresh insight into the health of the defacto economy of the world — the United States of America’s economy and the labor-market conditions in particular.
If the labor market is growing, that means more people are making money, and the more spending there will be. More spending results in a higher Gross Domestic Product which is the broadest measure of the economy. Employment figures can also have an impact on interest rates, as higher employment will lead to higher interest rates because of central bank policies aimed at balancing inflation with growth. And as you probably know, interest rates are a significant factor for Forex traders.
For Forex traders, NFP reports go hand-in-hand with interest rates because they are directly correlated to a nation’s currency value. If the NFP shows a healthy US economy — with high employment, job growth and wage increases — it’s likely to attract investment from around the world. This could drive up the price of the US dollar and impact major currency pairs. However, if the NFP shows an unhealthy US economy — with high unemployment, low job growth and wage stagnation — then investment rates will fall. This would likely cause the US dollar to fall in comparison to other currencies.
Currency Pairs Most Affected By NFP: USD-based pairs such as EUR/USD, AUD/USD, USD/JPY, USD/CHF, GBP/USD, and others are most affected by the NFP release. However, other pairs may be affected as well.
Indices & Stocks
Strong employment data in NFP report is a sign that companies across industries are doing well, which can lead to increased optimism around company stocks. Conversely, positive USD data can negatively affect US indices such as the Dow Jones and the S&P 500, both of which tend to have a negative correlation with a stronger dollar.
Also, NFP reports look at the impact the labour force has on the economy, which will have knock-on effects on the stock market as well as the price of commodities such as gold and silver. If the NFP data indicates the US economy is in a period of contraction, popular safe havens such as gold and silver may see increased investment flows.
The NFP has an impact on gold if only because of its effect on the dollar. A strong NFP may, in fact, support gold prices if there is a sign of industrial and/or physical demand within the economy. If not, you can expect to see gold move contrary to the dollar in relation to the labor data most times
How to trade NFP reports
Before proceeding, note that before the NFP release, economists and analysts will attempt to predict what the headline NFP number will be and eventually arrive at a consensus estimate. Once the real figures are released, the market response will depend on how close the estimate was to the actual figure — as any surprises will cause traders to rush in and out of positions.
By far the most effective way of using the NFP for trading is from the long-term perspective. Basically what you are doing is using the NFP to determine or confirm the trend, changes in trend, and major turning points in the market. If the NFP is trending positively and showing signs of strength ie trending above the 12-month average then the fundamental trend of the market is bullish.
In this case, it is advisable to follow only bullish signals when they are presented on a price chart. Price corrections and pull-backs to support levels are often opportune entry points for longer-term style trades
- Opening positions just before the NFP release can be very risky since it is difficult to make accurate predictions and the market is very volatile. However, analyzing the latest report and observing the initial market reaction can be helpful in placing winning trades.
- Poor NFP numbers do not always lead to the collapse of the USD. In the case of global recession and economic crisis, the US dollar can benefit from its safe-haven status and appreciation against other currencies.
- NFP is very helpful with fundamental analysis in the sense that it can show the signs of recession before the actual Gross Domestic Product numbers can confirm it only some months later.
The volatility the NFP creates is what provides traders with opportunities for profit — but it is also risky. This makes it important to have a risk management strategy in place before you trade.
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