As a Forex trader, you may have heard about the term NFP which stands for Non-Farm Payrolls. It is a determining statistic and economic indicator in Forex trading. It is also one of the most anticipated reports in the Forex market.
That is why all Forex traders need to understand this term. So, what is NFP and how can we use it in our Forex trading?
Non-Farm Payroll is a report about the change in the number of employees in the United States, excluding farm workers, private household employees, and non-profit organization employees. The NFP data is measured by the Bureau of Labor Statistics (BLS) from payroll surveys throughout the United States.
The NFP report summarizes the status of employment in the country and includes some statistics. This report represents roughly 80% of the U.S. business sectors that contribute to the gross domestic product (GDP).
The NFP figure can be calculated using the following formula:
During non-recessional times, the number is typically between +10,000 and +250,000. The plus symbol indicates the number of jobs added over the last month. If the number is negative, it means that a number of jobs are lost compared to the last month – in other words, there is less workforce.
There are a few things you can learn from the NFP report:
1. The employment rate
This rate is presented as a percentage of the overall workforce and can affect the Federal Reserve's assessment of the U.S. current economy.
2. Changes in the number of jobs
The increasing or decreasing number of jobs across various sectors is also important for Forex traders to plan their future trading since they need to know which sectors of the economy are up or down.
3. Average hourly earnings
The hourly earnings can indicate whether the workforce increases or decreases. If the number of jobs is the same as the last month but the average earnings decrease, it means that there is less workforce.
4. Revisions of previous NFP
The first NFP report is actually an estimation and not an exact number. Therefore, there will be revisions after its release, and sometimes the margin of error is quite large. These revisions could have a sudden impact on the markets due to traders re-evaluating their movements.
When is the NFP report released?
This report is released monthly, on the first Friday of every month, at 8.30 a.m. Eastern Time. For example, the statistics released on the first Friday in February will include the data for the previous month, January.
The schedule is available on the Bureau of Labor Statistics website, and can also be accessed via Forex economic calendar.
Why is the NFP report important for Forex traders?
The NFP report shows the overall performance of the U.S. business. Economists and policymakers usually use the data to assess the current state of the country’s economy and predict future levels of economic activities.
This report is often used as an indicator of the interest rate changes made by the Federal Reserve. For example, when the rate of unemployment is high, policymakers would lower the interest rates to stimulate the economy, and when the economy is in a good state, policymakers would increase the interest rates. These policy changes affect the demand for the U.S. dollar.
Furthermore, many Forex participants anticipate whether the NFP figures are lower or higher than the previous months or whether they have met the market expectations or not. For example, if the Non-Farm Payrolls are lower than the economists' estimations, Forex traders may want to sell their U.S. dollars to avoid the weakening of the currency since the economic growth in the United States is not as good as expected. On the other hand, if the figures are higher than the estimates, traders may want to buy U.S. dollars since the economic growth is better than expected.
Therefore, the strengths of NFP data and the U.S. dollar are correlated, and that is why the NFP report can create large rate swings in the Forex market.
What financial instruments are affected by the NFP report?
Many financial instruments are affected by this report, especially the currency pairs involving the U.S. dollar (all major currency pairs), equities, and gold. However, there are cases where the NFP report significantly affects other financial instruments that are not related to the U.S. dollar.
For example, on March 8th, 2019, there was a big gap between the economists' estimations and the NFP release. It was expected that the number of added jobs to be around 180,000, but the NFP release only showed an addition of approximately 20,000 jobs. This huge difference caused the U.S. Dollar Index (DXY) to depreciate and the volatility to appreciate as illustrated below. The long red bars show a sharp decline in the value. Then, after a while, the value increases again as indicated by the green bar.
Should you trade using the NFP report?
Trading a highly volatile currency can be very profitable if you implement the right approaches and strategies. Bear in mind that it is very risky and dangerous, especially if you are inexperienced in Forex trading.
An important tip for all Forex traders is to use the Forex broker’s economic calendar to note down the date and time of the NFP releases in order to make some preparations.
Traders are highly advised to close any trade one or two hours before the NFP releases to avoid any large rate swings that may cause a financial loss. In addition, it is better to wait a while before opening a new trade after the release, because the most volatile period is 30 minutes after the NFP releases. Please note that the effect may last for two hours or more.
In conclusion, the Non-Farm Payroll report is undoubtedly an important monthly data point. Its release causes considerable changes and movements in the Forex market because it is always accompanied by increased volatility and widening spreads. Therefore, to trade successfully, you need to understand how the NFP report affects you, so you can pick the right strategies to deal with it.
