Non-Farm Payroll (NFP) and effect on the USD

Non-Farm Payroll (NFP) in Forex is one of the most important news release that traders never seem to put off their minds.

It is always released 1-2 days after the release of ADP Non-Farm employment change every first Friday of each Month.

NFP is referred to as the ‘Mother of Fundamentals.’

Let’s first take a look at ADP Non-Farm employment and see how it is related to NFP.

ADP Non-Farm employment

ADP data shows the number of people employed in the private sector in the U.S.A during the previous months. It excludes the farming industry and the government employees.

Most traders don’t put much attention to its release because it does not cause a big impact to the market. Instead, they use ADP to have a foresight about the NFP change.

What Forex traders look at in this report, is what impact the estimates will have on U.S. interest rates.

It also helps them to know what they should expect of the Non payroll(NFP) report.

A higher than expected reading is a good indicator for the U.S.dollar, while a lower than expected reading indicates a weakening USD.

The ADP National Employment Report s is released on the first Thursday of every month, at 8.15 am ET.

Non-Farm Payroll (NFP) data

The non-farm payroll (NFP) in Forex is a key economic indicator for the United States economy (USD).

It represents the number of jobs added, excluding farm employees, government employees, private household employees and employees of nonprofit organizations.

NFP includes data of employees under manufacturing, construction and goods producing economic sectors and government employment.

Along with the NFP data release are;

• Data on unemployment
• The Labor Force Participation Rate
• The Unemployment Rate
• Average Hourly Earnings
• And Average Workweek Hours, among many other statistics.

The non-farm payrolls (NFP) in Forex report is one of the most-anticipated economic news reports in the forex market.

 The U.S. Bureau of Labor Statistics releases NFP data on the first Friday of the month at 8:30 AM Eastern time.  The changes in the NFP have significant impact on the US economy.

How NFP changes affect the U.S.dollar and the Forex market

We already know that NFP is a key economic indicator for the United States economy.

This is because it shows the actual change in the number of people employed in U.S during the previous month.

NFP explains how well the economy is doing and what we should expect in future.

The U.S.A Economy(U.S.dollar)

When NFP data is positive/ greater than the previous,

it shows that companies are hiring more people hence a healthy economy.

People’s standards of living improve which leads to increase in demand of both domestic and foreign goods and services.

More spending results to a higher Gross Domestic Product (GDP) , increase in production, employment opportunities, inflation and interest rates.

As a result, more investors come in the country due to assured demand for their goods and services.

This leads to more demand for the dollar hence growth in the economy as well as the U.S. dollar

On the other hand,

A fall or negative NFP data shows that more staff is fired or companies don’t hire as many new people. This is a sign that economy is not doing so well or it’s collapsing.

Subsequently, those people lose income and can’t spend more money hence further slow down in the economy.

Less employment in the economy;

• Increases government expenditure and reduces on taxes and government revenues from private business and industries.
•  Leads to increase in negative trade balances as well as government debt.
•  May also lead to less expenditure on goods and services due to limited incomes hence a slow down in the economic development.
• Also leads to further fall in prices of the country’s goods and services thus discouraging investment in the country.

When this happens, foreign investors choose to liquidate their assets and investments and opt for more productive economies.

Similarly,those holding their money in the U.S.dollar start to sell off while buying higher yielding currencies hence fall in the value of U.S. dollar.

The forex Market

Forex traders and Fed FOMC can rely on the NFP data release to determine the health of the employment sector and the country’s entire economy.

The fact that the U.S. is the world’s largest economy and the Dollar is considered as the reserve currency, NFP data highly affect the Forex market.

More so, some currencies in the market such as CAD, AUD, NZD always respond to NFP data release because the value of these currencies is pegged to that of the U.S.dollar.

Similarly,many commodities like oil and gold are also priced at U.S. dollars.

At least now you know why Forex traders consider the Non-Farm Payroll (NFP) in Forex  as the Mother Fundamentals in the market.

It simply means, when the NFP news release is up, everything in the market somehow changes.

You will often see a panic in the market after the announcement of the data.

At times, it moves the market in a dramatic manner with very large candlesticks, long pin bars or sometimes no impact at all. 

 You have to compare the previous data, forecast figures with the actual figures reported by the Bureau of Labor Statistics to judge.

How do you trade NFP 

The Economic calendar always presents the previous data release, the forecasted data from economist and the actual data release.

To trade Non-Farm Payroll (NFP) in Forex , you have to first compare the actual news with the previous and forecasted data.

When the NFP news is higher than expected, the USD currency becomes stronger than the paired currencies in the market.

This means, buy the USD as a base currency or sell currencies quoted with the USD.

Buy currency pairs like USD/JPY, USD/CHF, USD/CAD and sell pairs like EUR/USD, GBP/USD, NZD/USD, AUD/USD.

When NFP data release is less than expected, it shows a weak USD relative to other currencies.

Therefore sell the USD against the paired currencies and buy pairs quoted with USD.

Sell currency pairs like USD/JPY, USD/CHF, USD/CAD and buy pairs like EUR/USD, GBP/USD, NZD/USD, AUD/USD.

Also, in case of commodities such as Oil and Gold, 

Buy when NFP data release is less than expected and sell when the NFP news is higher than expected

However,at times the news release may seem to have no impact on the market. Do nothing and wait for the pair to give a clear trend direction

This happens normally when the actual news release is the same as the forecasted.

Reason?  Because the big investors and traders have already adjusted their accounts as predicted.

As you plan to trade the Non-Farm Payroll (NFP) in Forex , take note of the other economic news release during the same period before you make any conclusions.

For instance, the unemployment rate. We cover this in our next lessons. Lets look at Crude oil Inventories effect on FX Market next.