What Is US Non-Farm Payroll (NFP)?
The US non-farm payroll employment is arguably the most-watched economic indicator in the world. It is a compiled name for goods, construction, and manufacturing companies in the US. It does not include farm workers, private household employees, or non-profit organization employees.
The non-farm payroll or NFP is the main economic indicator for the United States as it signifies the total number of paid workers in the US minus farm employees, government employees, private household employees, and employees of nonprofit organizations.
Substantially, the non-farm payrolls measure net changes in employment jobs and its releases trigger volatility in the forex market. With that in mind, forex traders usually use an economic calendar to determine their trade according to the NFP releases.
*You may refer to Doo Prime’s Weekly Economic Calendar here.
The financial assets most affected by the non-farm payroll (NFP) data include the US Dollar, equities, and gold. The market reacts very quickly and most of the time in a very volatile pattern around the time the NFP is released. The short-term market moves indicate that there is a very strong correlation between the NFP data and the strength of the US Dollar.
When NFP Data Is Released
The non-farm payroll is an influential statistic and economic indicator released monthly by the United States Department of Labor as part of a comprehensive report on the state of the labor market. Typically, this date occurs on the first Friday of the month at 8:30 AM EST. While the Bureau of Labor Statistics releases preliminary data on the third Friday after the conclusion week which includes the 12th month, at 8:30 AM EST.
NFP Data Analyzing
As mentioned above, the non-farm payroll report stirs up one of the consistently largest rate movements of any news announcement in the forex market. As a result, many analysts, traders and investors anticipate the NFP numbers and the directional movement it will cause.
Given that there are many parties involved in watching the report and analyzing it, the chances of large rate swings are still possible even when the numbers come in line with what is estimated.
Speaking of analyzing the non-farm report numbers, there are a few ways to interpret it, just like any other economic data.
In an economic sense, a higher payroll figure means that it is better for the economy as the employment rate is high and contributing to a healthier and more robust economic growth. Basically, consumers who have both money and a job tend to spend more which in return, leads to economic growth.
With that, it bodes well for the currency rate. Hence, forex traders and investors will usually look for a positive addition of at least 100,000 jobs per month. For instance, any number above 200,000 will take effect on the currency gain, in this case, the US Dollar.
An expected change in payroll figures creates a mixed reaction in the markets. More often than not, forex traders will usually turn to other sub-components and items to gain certain forms of direction or insight when perceiving an expected change in the NFP report which includes the unemployment rate and manufacturing payroll sub-components as well.
Therefore, if the unemployment rate decrease and the manufacturing payroll rise, forex traders will side with a strong dollar. In simple terms, forex traders will trade due to the positive effect on the US economy.
However, should the unemployment rate rise, with the manufacturing jobs dropping, forex traders will switch on trading other currencies and drop the US dollar.
On top of that, a lower payroll figure is detrimental to the US economy. In common with any other economic report, a lower employment rate signifies a negative sign for the world’s largest economy and the greenbacks.
If the NFP report indicates a decline below 100,000 jobs or less than what was estimated, it means that the US economy is stationary. As a result, forex traders will trade higher-yielding currencies against the US dollar.
Traders can benefit from the increased opportunity of making trades that yield higher profits on a variety of markets, yet the announcement can bring volatility which increases the risk.
In anticipation of the report release, economists will attempt to predict what the headline NFP numbers will be, usually arriving at a consensus estimate. The market response from the release can then be magnified depending on the closeness of the estimated to the actual figure.
The purpose of this is to attempt capturing rational movement after the release, instead of the irrational volatility pervading the first few minutes after the release.
The few trading instruments that are likely to be most affected are:
A robust US economy will drive investments globally which brings up the price of the US dollar. The major currency pairs affected by the NFP report are GBP/USD, EUR/USD, and AUD/USD.
Strong employment implies that businesses are doing well. However, a strong dollar can negatively affect the US indices such as Dow Jones, S&P 500, and NASDAQ.
Shall the US economy portray to be performing poorly, traders might switch their investing interest to gold and silver.
Powerful tools for trading the NFP
Ultimately, it is essential that traders keep an eye on the market and track analysts’ expectations and predictions accordingly so that well-informed decisions are made when trading the non-farm payrolls.
Browse through our CRM system for analysis provided by Trading Central which includes Analysis Views, Featured Ideas, Economic Insight, and Web TV to assist in our clients’ trading strategy.