Fundamental Analysis – NFP – What is it and How to Trade it?
The NFP of the Non-Farm Payrolls release is, perhaps, the most important piece of economic news out of the United States. That is, after the central bank’s meeting, press conferences, and all. If there is one single economic news to bring volatility for the U.S. dollar, other than the Federal Reserve of the United States (FED) meeting, then the NFP is. Like the name suggests, the NFP is referring to the jobs data. However, not all jobs are included in this number. The agricultural ones are not, and this makes it accurate for the overall state of the economy because the agricultural segment is a volatile one and jobs quantification is hard to make. The NFP number does include the government jobs, though. Unlike the ADP (ADP is 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.
The NFP number is key for the U.S. dollar and for the whole currency market. This comes from the fact that job creation is part of the Fed’s mandate. We mentioned here in previous articles that every central bank has the mandate to fulfill, 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 two percent. The only one bank that has a dual mandate, is the Fed: to keep inflation below or close to two percent 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 – Global Importance
The whole world is watching the NFP outcome, not only the United States. There are many reasons for this, and below are only a couple ones. 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 U.S. economy. This makes everything related to the interest rate set by the Fed to be important for the rest of the world too. Secondly, the U.S. dollar is the world’s reserve currency. It means that every clearing around the world is going through the dollar. Every emerging market loan is denominated in U.S. dollar terms. For this reason, when the interest rate on the dollar is changing, 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 changing the rates. If not changing the rates, at least changing 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 every first Friday of a month. Sometimes, but very rare, it is on a second Friday, due to either a holiday or some special events that prevented an earlier release. It is accustomed that major currency pairs, like the EURUSD and others, to range the whole week prior to the NFP release on Friday. Therefore, it is not recommended to take a swing trade at the start of the NFP week unless the analysis comes from a bigger time frame and considers a bigger period until reaching profit.
The NFP is released by the Bureau of Labor Statistics and the official name is Non-Farm Employment Change. It shows the change in the number of employed people in a month, excluding jobs in the farming industry. Pretty straight forward! The bigger the number, the better for the economy and the bigger the jump in the U.S. dollar will be. The lower the number, the more disappointed traders will be and the bigger the dip in the dollar. However, things are not all the times straightforward like this. The NFP is one of the most volatile economic releases, if not the most volatile. You must remember that these days humans are following robots, and not the other way around. Thus, 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 196K jobs to be created. Any number that comes in line with expectations will result in algo’s not knowing what to do and most likely the market will range if not trends of bigger degrees will resume. On the other hand, if the actual number will be lower than the expected one, algo’s will drive the U.S. dollar lower in a blink of an eye. The same is valid if the actual release will beat expectations, only this time the algo’s 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 NFP
The NFP number is famous for fake moves, and it is not seldom that the initial reaction will just be a spike or a dip to take the previous highs or lows, only for the real move until the end of the day to be in the opposite direction. Therefore, it is recommended to wait for the release before opening a new trade. Or, another way to trade the NFP number is to focus on a bigger time frame 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 economic data that offers an educated guess about consumer spending. This one, in turn, is a leading piece of information regarding the state of the economy. The Fed is watching 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 bigger time frames and spot potential support and resistance areas on charts bigger than the daily ones. If prices are moving into those areas, taking a small position in the NFP day will not hurt anyone. Another approach is to trade something else, a currency pair that doesn’t have the U.S. dollar in its componence. Such pairs are the crosses, like EURGBP or GBPCAD, or any other cross pair that doesn’t travel based on the U.S. dollar moves but based on the differences between the two majors that form the cross. This way, the trading account is protected from major swings in the dollar and traders live to fight the Forex markets for another day.
Recommended Further Readings
- Fundamental Analysis – Explaining the United Kingdom Economic Data
– Covering the economic data that matters for the GBP pairs
- Fundamental Analysis – Explaining the Canadian Economic Data
– – Covering the economic data that matters for the CAD pairs
- Fundamental Analysis – Explaining the Australian Economic Data
– Covering the economic data that matters for the AUD pairs
- Financial Products to Trade
– Different categories of financial products that a Forex Broker is offering for the retail clients, starting with the classical currency pairs, and continuing with commodities, CFD’s, indexes, etc.
- Forex Trading Sessions and Their Importance
– Explaining the differences between the three Forex trading sessions, what are their importance, ranking, etc.
- Forex Brokers Types – ECN or STP?
– What is ECN, STP, how d- brokers deal with client’s orders, advantages, and disadvantages of the tw- types.
Other Educational Materials
- “Intervention strategies and exchange rate volatility: a noise trading perspective.” Hung, Juann H. Journal of International Money and Finance 16, no. 5 (1997): 779-793.
- Macroeconomic derivatives: An initial analysis of market-based macro forecasts, uncertainty, and risk. Gurkaynak, Refet, and Justin Wolfers. No. w11929. National Bureau of Economic Research, 2006.