The Non-Farm Payroll (NFP) measures the change in the number of people who have been employed in sectors of the US economy excluding the agricultural sector, for the previous month. The NFP measures the number of jobs added/lost for the previous month in all sectors of the US economy except agriculture.
The data is released by the US Bureau of Labor Statistics on the 1st Friday of the new month at 9.30am EST so we will be having an NFP announcement today (Friday 7th August 2015)
To be able to trade this report you must be able to do two things:
a) Correctly interpret data
b) Trade the numbers
This report has high market impact because of the bearing it has on the employment and manufacturing data of countries such as China which produce goods and services used by US manufacturers and consumers. The NFP also has direct bearing on manufacturing, consumer confidence and spending, retail sales, GDP, inflation and trade balance
There are two components to an NFP report:
– Unemployment rate
– Employment change
For the report to be tradable, sets of data must not be in conflict. This means that if the employment change is higher than consensus, it must be followed by a lower unemployment rate. If the employment change is lower than consensus, it must be accompanied by a higher unemployment rate.
Another trade situation may be where one of the two data components experiences no change, accompanied by a change (positive or negative) of the other component. Any other situation may produce conflict in the data and result in the report being untradeable.
Trading the Numbers
The trader may select the appropriate currency pair to trade with. Investors consider the USDJPY as one of the best currency pairs to trade with, due to the positive correlation this pair has with the data. For example a weaker Yen and a stronger US Dollar may promote good manufacturing and employment data. A stronger Yen and weaker USD reflects poor manufacturing and employment data.
In deciding how to trade the NFP, consideration may also be given to how far the actual figure has deviated from the expected figures, and the month-month change in data. For instance, a wider deviation may produce higher market volatility, while a drastic change month on month may also produce a greater market response in the corresponding direction.
Today’s NFP may be a big market mover as it may signal whether the FED will move rates in September or not. The FED’s decision will depend on the two main objectives of the Central Bank: which are to keep inflation under control and to maximize employment. The economy is expected to add 225K new jobs, against the previous month’s 223K, whilst investors anticipate that the unemployment rate will remain unchanged at 5.3%. If the data is disappointing then traders may turn to the GBP and the AUD both of which may rise on dollar weakness. Either way, this could be the most watched NFP for months!