Pinnacle Forex Group

NonFarm Payroll:

What is Nonfarm Payroll?

Trading the US non-farm payroll is the most anticipated news event not only in foreign currency trading but also in many other investment and financial fields as well. The non-farm payroll is simply are report by the US Bureau of Labor and Statistics representing the number of paid US workers in all businesses, with the exception of the following:

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  General government employees
  
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  Private household employees
  
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  Employees of nonprofit organizations (who provide assistance to individuals)
  
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  Farm employees
  

The nonfarm payroll actually accounts for around 80% of the workers who produce the entire GDP for the US.  When looking for the report, you will find it throughout various financial news reporting services, at Pinnacle Forex Group we use Forex Factory. Most brokers will also have some sort of new reporting system that will give live updates on not only nonfarm but other major news events as well.  You will find this report on the first Friday of the month. This report is so important because it is used to assist government policy makers and economists determine the current state of the economy and predict what might be happening in the near future with economic growth. It also includes estimates on the average work week and the average weekly earnings of all non-farm employees. It’s vital that all traders are aware of this report as it may cause major movements in either direction on the day the report comes out.

How to trade Nonfarm
Now knowing what the NFP is we need to learn what goes into analyzing this report. We need to know what investors will likely be doing and where the markets are going to go so we can capitalize on the move. Many people mistakenly only use the NFP report and jump into a movement based on that alone. When analyzing the US NFP it’s a good idea to take a look at the other important economic reports first. Many times those additional reports will help forex traders get a heads up on how the NFP will turn out even before the release. Nobody ever will know the exact numbers of NFP before the report comes out that’s why everything is set as an estimate beforehand. When looking into what could be happening, it’s always a good idea to take a look at three other subcomponents as means of some good economic knowledge first. This strategy of looking at multiple reports can help currency investors weigh in on the real NFP possibilities through multiple sources.
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.

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  ISM Manufacturing Survey

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  This report is mostly a manufacturing report but does include an employment subcomponent. The importance isn’t that it offers any specific numbers. But, it does show the direction in which some companies are moving. When looking at this report a figure higher than 50 is symbolic of expansion in employment - while a figure below 50 signifies contraction.

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  ADP Employment Report
  
  The ADP report is a national survey, the ADP Employment Report is usually released a couple of days before the official NFP report. This report shows a pretty clear insight into the private business sector employment trends; which is widely seen as a precursor to the government's report.

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  Initial Jobless Claims
  
  This report is the most commonly watched of the three reports. This is 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. On a non-forex related note, this report is also a great report and the NFP are great reports to gauge the validity of political speeches. Many times numbers can be manipulated in a speech for someone not watching or educated enough to know what is going on. These reports can help you know who is trying to sound eloquent and is really lying to the public.  

Forex Analysis

Just like in any economic data release there are three basic ways to analyze the U.S. nonfarm payrolls number: 

A higher payroll figure is good for the U.S. economy. This higher number is good because more job additions help to contribute to healthier and more stable economic growth as a whole. This report helps consumers who have both money and a job tend to spend more - leading to all around growth (ie. Buying houses, cars, “toys” and more high ticket items). As a result, foreign exchange traders and investors look for a positive addition of at least 100,000 jobs per month. Any release above the 200,000 marker will boost and help fuel U.S. dollar gains. On the same note, any number above the consensus estimate release will likely have the same effect.

An expected change in payroll figures will cause a mixed reaction in the currency markets. Forex investors witnessing an anticipated change in the NFP report will turn to the other subcomponents of the report to gain some sort of direction or insight as to where they should be looking for the markets to turn, 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 and trade accordingly, as both of these are positives for a strong U.S. economy. On the other hand should the unemployment rate increase, along with a decline in manufacturing jobs, investors will instead sell the U.S. dollar for other currencies that are showing stronger numbers.

Third, as higher numbers are good for a US economy; lower payroll figures are detrimental for a U.S. economy. Like any other economic report, a lower employment picture is negative for the world's largest economy and the Dollar. Should the NFP report show a decline below 100,000 jobs (or a less than the forecast), it's a good sign that the U.S. economy is not growing. This may in many cases be contrary to what is being reported by politicians as they try to cover up the results of a bad economy. This type of report will likely result in FX traders favoring higher yielding currencies against the U.S. currency.

The Bottom Line

Employment will always be a major topic or event when it comes to FX trading. Employment reports are a key component of economic expansion and growth and the basis for the survival of any economy. The entire investment world looks at the U.S. and these reports to gauge where the world’s largest economy is heading simply because what happens here will inevitably ripple into the rest of the world. As a result, U.S. nonfarm payrolls will always serve as the most anticipated piece of news for currency investors and traders. Those who know and are aware of its implications and how to analyze it will always have an edge against those who don't. Be aware of the traders who coach traders into simply “getting in and letting it ride” on NFP reports. We can talk more about this in a later tutorial.
For now, this should give a little more insight on what we are looking at when trading Non-Farm reports. Please make sure you are trading carefully as Forex trading is not for everyone and NFP reports can and have made severe movements on the markets which may result in severe loss of capital if not traded correctly.