The Forex markets can be volatile and generally experience sharp price movements in the aftermath of an important economic release or monetary policy decision. Approximately 88% of the 5.5 trillion in Forex transactions that are traded globally are traded in US dollars. This means that economic events that are expected to impact the dollar can be key catalysts that drive the volatility in the Forex market. Several very important economic indicators drive US interest rates as well as the value of the greenback. The most important is the US employment report.
The Non-Farm Payroll Report
On the first Friday of every month, the US Department of Labor produces the government employment report. There are several sections of the report that are important to the trading community. The headline number is called the Non-Farm Payroll report (NFP). The NFP describes the net number of new private and government employees that have been added to payrolls in a month. The Department of Labor will break down the NFP into different categories. These include:
- Goods Producing
- Mining and Logging
- Manufacturing
- Retail Trade
- Utilities
- Financial
- Education and Health
- Other Services
The NFP report is a corporate report. The survey goes out to employers who provide information from payrolls to the Department of Labor. The NFP survey measures nonfarm employment, hours, and earnings by industry. In addition to the headline number, traders often evaluate the workweek, which is the number of hours worked, as well as average hourly earnings. The report will address the average hourly earnings for all employees on private nonfarm payrolls. It will also describe the average hourly earnings of private-sector production and nonsupervisory employees. The number of hours will be described using the average workweek for all employees on private nonfarm payrolls. The report will further breakdown hours worked in manufacturing and production as well as total overtime.
The Unemployment Rate
There is a second survey that is conducted simultaneously that is released at the same time as the NFP report. This report is called the employment rate report and is a household survey that measures labor force status, including unemployment, by demographic characteristics. Two main unemployment rates are consistently evaluated. The U-3 unemployment rate is the most commonly used unemployment in the United States and represents the number of people actively seeking a job. A second rate called the U-6 rate includes discouraged, underemployed, and unemployed workers in the country.
Conflicting Numbers
The two surveys can have conflicting and diverging numbers. While the corporate report deals will payrolls, the household report relies on individuals to answer questions about their employment status. There will be times when the NFP report rises and the unemployment rate also rises. Over time, these two reports will show similar numbers, but in the short-term, the divergence could generate short-term volatility.
Trading the Unemployment Report
The headline NFP number is the most widely watched economic figure. Since the US is the largest global economy and the dollar is the most widely traded currency, the jobs picture in the US takes on significant meaning. Economists will spend hours crunching through economic statistics to come up with an estimate of future NFP reports. You can find a range of estimates and an average estimate on an economic calendar. Rakuten Securities Australia provides the average economist estimate on its economic calendar and will update this information as soon as the US employment report is released. You can trade the Forex markets in multiple ways around the NFP report. You might believe that a specific economist that you follow might have a better gauge of the jobs picture in the US related to the average and take a position that reflects the difference. For example, if the average NFP increase is expected to be 200,000 but the economist that you trust the most is anticipating 350,000 new jobs, then you might purchase the USD, thinking that a larger than expected number will buoy US interest rates and drive the USD higher. Another way to trade is to wait until after the NFP is released and then buy into strength or sell into weakness. So, if the NFP is weaker than expected and the dollar begins to sell off, you might consider trading with the trend as the USD exchange rate moves lower. Traders tend to believe that the first impulse move will provide the direction for the duration of a trading day or longer. You should also consider using a chart that can show you short-term horizons such as intra-day periods like 15-minutes or 5-minutes. The MT4 charts provided by Rakuten Securities Australia have intra-day charts that will allow you to determine support and resistance levels. Following the NFP report, you can determine whether a Forex pair has broken out and if you want to ride the exchange rate to higher levels.
Risk Management Around the NFP
If you plan to trade around the NFP report, you need to use prudent risk management. If you hold a position into a report, you should be aware that the initial impulse moves might be significant and your stop-loss levels might be triggered at unattractive levels. Even if you place stop-loss limit orders, the move in the wake of the NFP report might be extreme and not be triggered. The best way to trade ahead of the NFP number is to take a position size that is small enough that a large move will not significantly impact your P&L.
The Bottom Line
The Non-farm Payroll report reflects the employment situation in the United States. Since the majority of Forex transactions traded daily involved the US dollar, an economic report that could change the view of traders could be a key catalyst in providing the direction of the Forex markets. Two key reports are released as part of the US employment report. They are the NFP report and the Household survey unemployment rate report. There are several ways to trade around the NFP number, including trading ahead of the number or trading after the number. Regardless of how you trade around the NFP report, you should have a prudent risk management plan in place.