The Use of Non-Farm Payroll Reports
Among the regular economic announcements launched by the governments of major economies, the most important one so far is the Nonfarm payroll report or the NFP. And the Bureau of Labor Statistics in the United States releases this. The market can react a little extreme to these reports. At some point, this is a well-known strategy to trade these announcements. Right now, people might often see most of the large players out there remaining outside of the market during these announcements.
What is the NFP Report?
The Nonfarm Payroll announcement is the U.S. jobs report – along with farm-related jobs, unincorporated self-employment, nonprofit organizations, and military and intelligence agencies.
Then, they release the report during the first Friday of every month at 8:30 a.m. Eastern Standard Time. It will outline the number of jobs either added to or subtracted from the previous month’s economy.
Obviously, other central banks have employment figures too, but forex traders don’t pay that much attention to them as the U.S. dollar is the world’s most reserve currency. Somehow, all major forex pairs are connected to the U.S. dollar. Thus, it makes sense that it would have a massive effect on the way money flows back and forth across international borders.
The Break Down
Aside from reporting how many jobs it adds or subtracts, the Nonfarm Payroll also breaks down jobs by sector. Then, some of the sectors include wholesale trade, retail, healthcare, transportation and warehousing, mining, construction, and a lot more. With that, it gives people an idea of how the American economy is growing and the part where sectors are growing. This kind of information is equally useful for stock traders.
Usually, approximately a week before the announcement comes out, people will start to see predictions out as to where the information would land. If the announcement comes out as expected, it doesn’t have that much effect on the forex markets. But if there is a massive miss in either direction, the U.S. dollar usually reacts quite strongly. And this is exacerbated by the lack of liquidity during the time of the announcement. If there is a variable spread broker, they will see spreads widen out over the announcement as most large funds step away.
Moreover, the unemployment rate is in the announcement, too, as it arrives simultaneously. The higher the employment rate, the weaker the economy becomes. And this is because people won’t hire workers if the economy slows down. So, a rising unemployment rate is often bad for the U.S. dollar. Alternately, once the unemployment rate continues to dwindle, it indicates that more people are working – meaning the Federal Reserve is more likely to increase interest rates. With that, the U.S. dollar will appreciate in value.
Similar to other government figures, there are many critics out there. Generally, traders see the Nonfarm Payroll announcement as the best figures they have to work with, so the market will focus on them. But still, it’s not that correct, as if people look at the numbers a year later, they are often corrected and revised, typically lower.