Trading the Non-Farm Payroll (NFP) Report

The Non-farm Payroll (NFP) report is one of America’s most important economic announcements. The report reveals how many people are currently working in US manufacturing, construction, and goods industries. This data is significant because these jobs represent 80% of the USA’s total workforce.

The NFP report doesn’t include the farm workers, government employees, private household staff and anyone working for a non-profit organization.

It is (usually) released on the first Friday of every month at 8:30 AM New York time and is commonly seen as a major source of trading opportunities.

Why Trade the NFP?

The NFP is important for traders because it is a catalyst for higher volatility. A volatile market is a major source of trading opportunities and bigger profits, but at the same time, it can also cause large losses because it does add additional risk.

The NFP job figures tell analysts a lot about the health of the US economy. If the number is much higher or lower than the expected figure, it can have a sudden impact on financial and FX markets. These extreme shifts in currency value make good trading opportunities, but as we mentioned before, volatility also amplifies risk.

Which Currency Pairs Should I Trade?

The major currency pairs like the EUR/USD, GBP/USD, AUD/USD or USD/JPY are favourites to trade during the NFP news release. The major currency pair values move significantly as traders buy or sell the USD depending on how well the US economy is doing.  Investors will also buy and sell shares based on expected future growth, so the major stock indices tend to move swiftly too.

Avoid trading cross-currency pairs such as EUR/JPY, EUR/AUD, GBP/JPY, etc. The cross currency pairs tend to produce large whipsaws (quickly reversing pivots) and are less predictable compared to the major currency pairs.

Trading opportunities surrounding the release of the NFP are not limited to the FX markets. An experienced trader should do research to find the best trading opportunities but always proceed with caution.

Commodities which are tethered to the USD will also change in value and create trading opportunities. A good example of this is gold. Gold is seen by investors as a safe-haven in times when the USD is expected to drop. Depending on the jobs numbers, and how confident investors are in the economy, the gold price can also see significant changes in value.

While volatility creates opportunities to profit, it can just as easily lead to losses. So when trading the NFP always consider using stop-losses to manage your risk. Unless you are a scalper, you may even want to wait for the markets to calm down a little before you take a position.

Tips For Trading the NFP Report

A lot of professional traders choose not to trade during the NFP news release because of the risk associated with the increased volatility. If you are comfortable with participating in a market during high-impact news announcements, there are a few tricks that will give you an advantage.

Trade Strong Moves

The most important thing you have to keep in mind is that the strongest movements will always come as a result of one of two things. Either the NFP figures miss the market expectation or either the NFP figures are exceptionally higher than market expectation.

Should the NFP figures miss the market, this will have a negative impact on the USD value and would create a good  USD shorting opportunity. On the flip side, if the figures are better than expected, there will be a good opportunity to open a long position.

For example. the Non-farm payroll figures from June 3rd, 2016, unexpectedly were a big miss. The general consensus was for the market to add 159k new jobs in May. But, the figures came in very low and only 38k new jobs were added during the previous month. The market sold the USD heavily, which meant the dollar crosses like the EUR/USD rallied (see Figure 1).

Figure 1: EUR/USD 5-Minute Chart

If you’re not already positioned long before the NFP release, the best way to catch this trade is to enter the market as soon as possible once it is released.

To do this you will have to endure some slippage, which can't be overcome because of the nature of the market to exhibit large movements in such circumstance. Under no circumstances, can a trader fade this move as you always want to trade in the direction of the first reaction.  This is by far the most favourable and the most profitable NFP scenario that you can have.

Fade Weak Moves

The second best NFP scenario is when there is no major change in the payroll figures. In this scenario, it’s always best to fade the first move as the first move is likely a stop hunt before the real move begins.

Let’s take another example of the Non-farm payroll figures from May 6th, 2016 when the NFP figures missed market expectations and came in lower at 160k instead of the predicted 203k jobs.

In Figure 2 we can see that the initial reaction was as expected. A bad NFP figure means a lower dollar, thus a higher EUR/USD. But it is not always about the numbers. It is best to put some context around the NFP figures and add that to the technical picture.  In this case, the prevailing EUR/USD trend was down. As predicted, the first move was a fake-out and which became a big whipsaw.

Figure 2: EUR/USD 1H Chart

These are not set in stone rules. They are just guidelines and as you gain experience you’ll become more proficient in analyzing price action in the NFP release. Above all, remember that trading during the NFP report carries an increased risk due to the high volatility. As such it’s wise to adjust your portion size in such to each situation.

The Non-Farm Payroll (NFP) Report is available at the US Bureau of labour statistics.