What are non-farm payrolls?

The US non-farm payrolls, or 'NFPs', is an official statistic released by the US Department of Labor, usually on the first Friday of every month.   

The non-farm payrolls measure the number of people currently in employment in the US and are released along with the US unemployment rate. Both are important yardsticks used by traders and analysts alike to get an insight into the health of the US economy. Specifically, the non-farm payrolls measure the number of people in employment in all businesses across the country, excluding agricultural, local government, private household and not-for-profit sectors.

The non-farm payrolls are considered to be one of the most robust measures of the health of the US economy, as they can give an insight into future important data releases such as gross domestic product ('GDP') figures and manufacturing data. This is because the higher the number of people in employment in a country, the better its economic output can be expected to be at the end of the quarter and vice versa.

For instance, consistently falling non-farm payroll figures could indicate weakness and the risk of a possible recession, whereas consistently robust data on a month-on-month basis could show a strengthening economy, possibly even indicating that the economy may be out of danger of falling into a recession.

Analysts release forecasts ahead of the release of the non-farm payrolls announcement, indicating a predicted number. When the payroll figures come in above expectations, or miss estimates on their release, it could take the markets by surprise and have a positive or negative impact on the US dollar and headline indices such as the Dow Jones Industrial Average. For instance, a better-than-expected NFP release could push the US dollar higher against other currencies, whereas lower-than-expected data may put pressure on the value of the US dollar against a basket of other currencies such as the euro, sterling or yen. It is for this reason that trading the non-farm payrolls can form an important aspect of your spread betting or CFD trading strategy.

When are non-farm payrolls released? 

The non-farm payrolls are usually released at 1.30pm (UK time), or 8.30am (EST) on the first Friday of every month and offer insight into month-on-month and year-on-year data. Month-on-month shows last month’s number compared to the prior month, while year-on-year shows last month’s figure compared to the same month a year earlier.

As a trader you can take a position on the US dollar and US indices based on whether you think the non-farm payrolls will come in above or below expectations.

How to trade the non-farm payrolls report

Some traders take a position in the markets around the NFP release as the data has historically been known to cause sudden price movements in the market, giving rise to potential trading opportunities.

For example, let's say it is the first Friday of May and you expect the non-farm payrolls data released today to exceed analysts’ expectations. EUR/USD is currently trading at 1.13835/1.13842 (sell price/buy price). Forex is always traded in pairs, with the first currency (also known as the base currency) quoted against the second or counter currency in the pair. This means that if you expect the first currency to rise against the second, you buy and if you expect that the first currency to fall against the second currency, you sell.

In the example above, you believe that, buoyed by positive payroll figures, the US dollar will rise against a basket of currencies, including the euro. Based on this assumption, you expect the euro will fall against the dollar and take a short spread betting position on EUR/USD, selling at 1.13835, at £2 per point. This means that for every point EUR moves lower against USD, you would make £2, whereas for every point EUR moves higher against USD, you would lose £2.

Let’s say you were right and the official NFP release data exceeds expectations, showing that the number of employed people in the US jumped by 5% month-on-month and 2.5% annually, a possible indication that the US economy has finally turned a corner. 

The markets react positively to this news and within minutes of the NFP release, the US dollar has risen against the euro. When EUR/USD reaches 1.13813/1.13820, you decide to close your position, buying at 1.13820. Remember in this example, because EUR is the base currency and USD is the counter currency, the price of EUR/USD would have to fall in order for you to make a profit.

You sold at 1.13835 and bought at 1.13820, meaning that you made a profit of £30 (1.13835 - 1.13820 x £2).

Had the non-farm payrolls figures come in lower than expected, however, driving up the price of the euro against the dollar to, let's say 1.13850, you would have made a loss of £30 (1.13835 – 1.13850 x £2).

See a detailed example how you can trade forex  with CMC Markets.

Summary

As a trader, it's important that you keep an eye on the market and track analysts’ expectations, so that you can make more informed decisions when trading the non-farm payrolls.

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