Quick Guide to Trading the Non-Farm Payrolls

Previous vs. Consensus vs. Actual

In the last release of the non-farm employment change, the market was treated to nice surprise. The non-farm payrolls showed that 244,000 net jobs were added, significantly higher than the 185,000 increase initially expected. In addition to beating forecast, the number was also an improvement from the prior month’s 221,000 gain.

This time around, the market doesn’t seem so optimistic, as the non-farm employment change is expected to show that employers hired fewer workers due to the huge jump in fuel costs. The market anticipates that only 194,000 jobs were added in May.

Non-farm payrolls trend

Looking at the overall trend in the non-farm payrolls, it seems that hiring is improving. It has risen consistently from December’s weak 36,000 figure to as high as 244,000 last month. While it did fall slightly during February, there’s no denying that the jobs being created have been rising.

Impact on EUR/USD of the last releases

April 1, 2011

Effect on EUR/USD of April NFP Report

For the better part of the Asian and European trading sessions, EUR/USD was pretty much in a standstill, as traders were probably waiting for the NFP release. When the report came out higher than forecast, EUR/USD busted out of consolidation and dropped 80 pips. However, the pair soon reversed and rallied 150 pips higher during the European close.

May 6, 2011

Effect on EUR/USD of May NFP Report

In the May release, the NFP report once again came in better than expected, coming in at 244,000 and way above the 185,000 forecast. This time around, we saw a spike lower of about 40 pips before it jumped up 100 pips. However, risk aversion soon kicked in and sent EUR/USD diving lower by 200 pips!

So how do we trade the NFP?

As expected, the NFP caused quite a stir in the forex market. Looking at the charts though, you’ll notice that the big move came a couple hours AFTER the release of the report.

In addition, the move turned out to be the opposite of the immediate reaction to the report. This hints to me that it might be best to wait first before establishing a position.

Another thing to keep in mind is what was the dominating market sentiment that week? Was it risk aversion or risk appetite?

In the days leading up to the April release, EUR/USD traded slightly higher, indicating that risk sentiment was probably keeping the pair afloat. Then on the Thursday before the May report, EUR/USD actually dropped 300 pips on sovereign debt fears, bringing risk aversion back into play.

So far this week, EUR/USD has been climbing up the charts. If tomorrow’s NFP report comes out better than expected, it may just help the pair end the week on a high note.

  • Steve44MCaUSAFX

    I read this over 5+ times and still do not get the point.
    If USD Data is Better than expected, shouldn’t we expected the EUR/USD pair to go down due to the positive news?  It did in April then once the new news was old news, went the other way big time and ended up long term going opposite of expected.  About a 1 hr predictive response only.  
    This all that seems understandable and makes since.  Short predictable reactions to the news makes some since.
    Then in May there seem to be a move in an unexpected direction.  Was that due to the Sell Sell Sell that went on?  Then a dive down 1-2 hours later in the expected direction. 
    Completely different results based on the same kind of positive data. What I see is NON predictive behavior, Not exactly what a newbie would expect according the all the professional books and articles. 
    Positive data for a country should render that currency to get stronger.  Shouldn’t it?
    Can someone please explain why this seems so Backwards to logic.
    I see no way to contribute this or measure it to RISK temperature. 
    Lost my Crystal Risk Measurement Ball years ago.
    My Logical Friend Spock wants to know what is going on here.    

    • pon

      That’s USUALLY the case, but because of risk sentiment, traders do not necessarily follow fundamentals. Positive U.S. data could lead to optimism on the global recovery, which gives investors reason to engage in carry trade and put their money in high-return assets such as the AUD, NZD, EUR, etc. The USD isn’t a high-yielding asset (interest rates <.25%).

      • Steve44MCaUSAFX

        Thanks.  I assume.  “That’s the Case”, can be replaced with. “Ya normally backwards of what you would think”. but because of risk…..

        Also make me wonder if that is the case for ALL currencies.  Or are you referring only to the USD data.

        I can not figure, how you guys figure out what the Risk Temp is.
        risk aversion or risk appetite.
        Like I said.. Lost my Crystal Risk Telling Ball.

        But thanks for the reply. 

  • Dean FX Paul

    Great analysis. This one ended up close to the expected.. so little impact only.

    • Gleewer

      Think you’re thinking about some other number, because the NFP just came out (45 min before posting this) and it way much lower than expected.

  • Gareth Owen

    How important is the difference in expected results and actual results in comparison to the difference between previous results and new results? eg what would happen if numbers were an improvement on the previous periods numbers, but still lower than anticipated?

    • Mattspips

       Thats something really difficult to determine, its almost not worth trading if you see some discrepancies like that. 

      • guest

        or worth trading with expectation of gaining from the uncertainty and volatility there-of.