Fundamental Analysis (NFP) – What it is, and How to Trade it

The Non-Farm Payrolls release (NFP) is, perhaps, the most important piece of economic news from the United States; that is, after the central bank’s meeting, press conferences, etc. If there is one single economic news item that brings volatility for the US dollar, other than the Federal Reserve of the United States (FED) meeting, then the NFP is it. As the name suggests, the NFP refers to the jobs data. However, not all jobs are included in this number. The agricultural ones are not, and this makes it more accurate for the overall state of the economy, because the agricultural segment is a volatile one and jobs quantification is hard to do. The NFP number does include government jobs, though. Unlike the ADP (another jobs indicator that considers only the private payrolls created in the United States in a month), the NFP includes, for example, jobs created in state hospitals, and other government-related ones.

Importance of the NFP

The NFP figure is key for the US dollar, and for the whole currency market. This is because job creation is part of the Fed’s mandate. We mentioned here in previous articles that every central bank has a mandate to fulfil, and most of the central banks in the world – in the capitalistic world, at least – have one mandate: to keep inflation below or close to 2%. The Fed is the only bank that has a dual mandate: to keep inflation below or close to 2% and to create jobs. Therefore, the one thing that matters the most for a currency, and for currency traders – interest rates – will move when both parts of the mandate are accomplished. If only inflation picks up, the Fed may have a hawkish tone, or may even hike once, but it will not be enough to call it the start of a tightening cycle.

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NFP – Its Global Importance

The whole world watches the NFP outcome, not just the United States. There are many reasons for this, and below are only a couple of them. Firstly, the Fed is the biggest central bank in the world, the most influential one, and the one that governs over the biggest economy in the world: the US economy. This makes everything related to the interest rate set by the Fed important for the rest of the world too. Secondly, the US dollar is the world’s reserve currency, which means that every clearing trade in the world goes through the dollar. Every emerging market loan is denominated in US dollar terms, and for this reason, when the interest rate on the dollar changes, or some economic data points to a possible change in the interest rate, the entire world listens. The NFP is part of the economic data that can make the Fed change its rates; or if not change the rates, at least change the tone of the Federal Open Market Committee statement, as a first step before cutting or hiking rates.

NFP Details and Interpretation

The NFP is released on the first Friday of every month. Sometimes, although very rarely, it is on the second Friday, due to either a holiday or some special event that prevented an earlier release. It is customary for major currency pairs, such as the EUR/USD and others, to range for the whole week prior to the NFP release on Friday. In view of this, it is not recommended to take a swing trade at the start of the NFP week unless the analysis comes from a longer timeframe and considers a longer period before reaching profit.
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The NFP is released by the Bureau of Labor Statistics, and its official name is the Non-Farm Employment Change. It shows the change in the number of employed people in a month, excluding jobs in the farming industry. Pretty straightforward! The bigger the number, the better for the economy, and the bigger the jump in the US dollar will be; and conversely, the lower the number, the more disappointed traders will be, and the bigger the dip in the dollar. However, things are not always as straightforward as this. The NFP is one of the most volatile economic releases, if not the most volatile. You must remember that these days humans follow robots, and not the other way around. These trading algorithms are programmed to buy or sell the immediate outcome, or the actual number of the NFP release. The image above shows that the forecast for the March release is for 196,000 jobs to be created. Any number that comes in line with expectations will result in the algos not knowing what to do, and most likely the market will range; or if not, trends of bigger degrees will resume. On the other hand, if the actual number is lower than the expected one, algos will drive the US dollar lower in the blink of an eye. The same is valid if the actual release beats expectations, only this time the algos will buy the dollar aggressively. The bigger the difference between the actual number and the expected one, the stronger and more powerful the initial reaction will be.

Volatility caused by the NFP

The NFP figure is famous for fake moves, and it is common enough that the initial reaction will just be a spike or a dip to take the previous highs or lows, only for the real move at the end of the day to be in the opposite direction. It is therefore recommended to wait for the release before opening a new trade. Alternatively, another way to trade the NFP number is to focus on a longer timeframe analysis. If the trading decision is the result of a trading analysis on a monthly, weekly, or even daily chart, then the number can be ignored. This is, however, a risky approach. The NFP is a vital item of economic data that offers an educated guess about consumer spending. It is, in turn, a leading piece of information regarding the state of the economy. The Fed watches closely, and any good or bad NFP print will result in market expectations regarding the potential future moves the Fed will do to shift dramatically.

I would say that the way to properly trade the NFP is to stick to the longer timeframes and spot potential support and resistance areas on charts longer than the daily ones. If prices move into those areas, taking a small position on the NFP day will not hurt anyone. Another approach is to trade something else, a currency pair that doesn’t have the US dollar in its componence. Such pairs are the crosses, such as the EUR/GBP or GBP/CAD, or any other cross pair that doesn’t travel based on the US dollar moves, but based on the differences between the two majors that form the cross. In this way, the trading account is protected from major swings in the dollar, and traders live to fight the Forex markets another day.

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