This website uses cookies to ensure you get the best experience on our website.
20th Jul 2020

Our Top Tips to Trading the NFP

One of the most important economic indicators to hit the global financial markets is the US Non-Farm Payroll (NFP) report. Released on the first Friday of each month, at 8:30am EST, by the US Bureau of Labor Statistics, the report gives the total number of paid workers in the US economy, minus the farming sector, government and private household employees. 

The report provides a way to gauge the state of the US economy, the largest economy in the world and closely watched by a huge number of traders and investors worldwide. This is why, the markets typically respond with huge movements in asset prices, especially forex prices, when the data is released. This, in turn, offers, plenty of trading opportunities. 
There are 3 aspects of the US NFP report that can help analyse the US economy:
  1. Payroll Numbers: This is the number of job additions or losses. A higher payroll figure indicates a stronger economy. Forex traders typically expect at least more than 100,000 job additions per month. An above consensus figure tends to lead to bullish market momentum.
  2. Unemployment Rate: If the payroll figures match expectations, the forex market’s reaction tends to be mixed. Traders will, therefore, look deeper into the unemployment rate to get a better perspective. A decline in the unemployment rate and rise in manufacturing payrolls usually drives the value of the US Dollar up. Conversely, if the unemployment rate rises, traders tend to leave the US Dollar, in favour of higher-yielding currencies.
  3. Average Hourly Earnings: Wages earned by workers, on average, gives a glimpse into US consumer spending. Eroding purchasing power indicates a weaker US economy.
The US Federal Reserve takes note of these numbers to decide on its monetary policy. It can increase interest rates, if the economy is performing well and jobs are rising, which leads to US Dollar appreciation. If unemployment surges, the Fed might cut the official interest rates to stimulate growth, which leads to Dollar depreciation.
Traders need to be aware of the currencies that see the most fluctuations, following the release of the NFP. Currency pairs that include the US Dollar are the most affected, including all majors, such as the EUR/USD, GBP/USD, AUD/USD, USD/JPY and USD/CHF. Other currencies might also show increased volatility, such as the CAD/JPY and NZD/JPY.

Pairs like the EUR/USD, AUD/USD and GBP/USD are mostly traded due to their higher liquidity. USD/JPY and USD/CHF are considered safe haven currency pairs, which traders flock to when the markets reflect a gloomy economic outlook.
There can be wild speculation regarding the direction of a particular currency pair, just before the NFP release. Many traders will wait to capture the rational movements after the release, instead of trading the huge volatility prior to the release. Liquidity may dry up in the markets at this time of high volatility, as traders wait for the release. Medium-term swing traders, particularly, stay out, as prices often range sideways before the release. Sudden volatility spikes can lead to positions being closed out.
The most important thing to remember is that the actual NFP numbers are never traded. Rather, traders speculate on the forecasts and reactions to those numbers.
There are two reactions to the release:
  1. Immediate Volatility Spike: From 8:30am EST to 8:45am EST, it is best to stay out of the market. This will be the first bar after the NFP report. By doing this, traders make sure they don’t get whipsawed out of the market, before a trend is established.
  2. Price Gaining Definite Momentum: As more traders start reflecting on the numbers released, price tends to trend in a particular direction. When the numbers are higher than the forecast and those of the previous month, the USD rises. When the numbers are lower than expected, the USD declines. In case the numbers rise, but do not meet expectations, traders can expect a rise in volatility.
For a 1-minute chart for USD/JPY, Fibonacci retracement levels can be set, depending on the initial direction. Traders can enter a trade, when the price retraces back to the 61.8%, 78.6%, or 88.6% retracement levels. Alternately, one could also wait for the price to move beyond the initial reaction swing high or low.
For long positions, stop loss can be placed 5 pips below the swing low, while for short positions, it can be placed 5 pips above the swing high.

Trading the non-farm payrolls, like any major economic event, can be heady stuff. While there can be great opportunities, there are also greater risks. Ensure to have your risk strategy well in place if you’re going to trade close to the time the NFP is released.