Forex: Trading The U.S. Nonfarm Payroll Report

Another good Article on Forex Trading.


Released on the first Friday of every month, the U.S. nonfarm payroll report is one of the most highly anticipated economic releases for currency traders. Not only does the report carry with it extreme daily volatility, but it can also help or hurt a long-term currency trend. Here's an inside look at what the report entails and how an investor can profit from it. (For more, check out Trading The Nonfarm Payroll Report.)
TUTORIALS: Economic Indicators
What It Is
Reported monthly, the U.S. nonfarm payrolls survey is compiled by the Bureau of Labor Statistics (BLS) - a division of the United States Labor Department. It includes important employment data that is comprised through the compilation of two surveys: the household and establishment or payroll survey. The household survey is relatively self explanatory – it is based on interviews with U.S. households. But, the establishment survey is built on interviews with U.S. businesses. This is key to the report as it shows what U.S. manufacturers and other businesses are thinking about when it comes to the economy. If business owners see positive economic growth in the future, they will increase hiring and boost overall survey results.

Aside from the headline figure, additional numbers are released in order to support or deny the Bureau's findings; These include the unemployment rate, average hourly earnings and the manufacturing subcomponent of the report. The manufacturing subcomponent shows specific growth or contraction in the manufacturing sector every month. (To learn more about the unemployment rate, read The Unemployment Rate: Get Real.)

Looking at the Numbers
Now that we have that all settled, what goes into analyzing the nonfarm payrolls number? And, even more importantly, how does a foreign exchange investor view it?

When analyzing the U.S. nonfarm payroll employment survey and its subcomponents, it's always good to take a look at other important economic reports first. This is because sometimes these additional reports can help a currency investor clue in on the actual NFP result before the release. Now, it doesn't produce a definitive number. But, a currency investor can narrow the field of results by taking a look at these three reports.

•ISM Manufacturing Survey
Mainly a manufacturing report, the release does include an employment subcomponent. It doesn't offer any specific numbers. But, it does show the direction in which some companies are moving. A figure higher than 50 is symbolic of expansion in employment - while a figure below 50 signifies contraction.


•ADP Employment Report
A national survey, the ADP Employment Report is usually released a couple of days before the official NFP report. The report offers actual insight into private business sector employment trends and is widely seen as a precursor to the government's report.


•Initial Jobless Claims
A weekly report tracking claimers of unemployment benefits, this release offers great insight into conditions in the U.S. labor market. Although it has a low rate of impact on the markets, the report is crucial for macroeconomic analysis and foreign exchange traders. But, there's one thing to keep in mind - keep an eye on the four-week moving average. This is a great gauge to see where the current number falls in relation to recent trends. (For more indicators, see Using Coincident And Lagging Indicators.)
Forex Analysis
Like any other piece of economic data there are three ways to analyze the U.S. nonfarm payrolls number:

•A higher payroll figure is good for the U.S. economy. This is because more job additions help to contribute to healthier and more robust economic growth. Consumers who tend to have both money and a job tend to spend more - leading to all around growth. As a result, foreign exchange traders and investors look for a positive addition of at least 100,000 jobs per month. Any release above - let's say 200,000 - will help to fuel U.S. dollar gains. An above consensus estimate release will have the same effect.


•An expected change in payroll figure causes a mixed reaction in the currency markets. FX investors witnessing an expected change in the NFP report will turn to other subcomponents and items to gain some sort of direction or insight. This includes the unemployment rate and manufacturing payrolls subcomponent. So, if the unemployment rate drops or manufacturing payrolls rise, currency traders will side with a stronger dollar - both being positives for the U.S. economy. But, should the unemployment rate increase, along with a decline in manufacturing jobs, investors will instead drop the U.S. dollar for other currencies.


•A lower payroll figure is detrimental for the U.S. economy. Like any other economic report, a lower employment picture is negative for the world's largest economy - and the greenback. Should the NFP report show a decline below 100,000 jobs (or a less than estimated print), it's a good sign that the U.S. economy isn't growing. As a result, FX traders will favor higher yielding currencies against the U.S. currency.
The Bottom Line
Employment will always be a hot topic when it comes to FX trading. It is a key driver of economic expansion and the basis for the survival of any economy. As a result, U.S. nonfarm payrolls will always serve as an important piece of news for the currency investor and trader. Those who know its implications and how to analyze it will always have an edge against those who don't. (For more on unemployment, read What You Need To Know About The Employment Report.)



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