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.

Trading strategies

With so many investors watching this data release, the payrolls can result in some sharp moves in the markets, both up and down, depending on how close the actual figure is to estimates made ahead of the announcement. This makes the payrolls a popular trading opportunity for many forex and indices traders.

There are several techniques used when it comes to trading the non-farm payrolls, with popular strategies including fading the initial move and trading the trend.

Fading the initial move

One approach is to wait and see how the markets react when the news comes out. Since market moves can be volatile, there could often be an initial knee-jerk reaction when the data is first released. This can be combated by adopting what's known as 'fading' the initial move. 

For instance, let's assume the payrolls have exceeded expectations and are therefore expected to boost the value of the US dollar against a basket of other major currencies including the pound. Instead, the GBP/USD exchange rate rallies as soon as the announcement comes out, and the pound initially moves sharply higher against the dollar. 

Fading such a move involves waiting for this initial rally to run out of steam, which may only take a few minutes. Once that's happened, traders could then short-sell GBP/USD, placing a stop-loss order over the high for the rally. The assumption is that the trader is expecting a move back to where the market was immediately before the non-farm payrolls were released.

This also works if the market drops quite aggressively once the number has been released. It would be useful, however, to wait and see if the market pauses and then buy the position with a stop-loss order under the most recent low. 

Trading the trend

Another approach is where traders assume the initial market reaction was actually correct. If the market has moved sharply after the non-farm payrolls release then one assumption is that this is the start of a trend for the day ahead. 

Traders often tend to look at previous reference points to confirm a new trend. For example, has the move broken the previous day's high? If so, some would see this as a significant change in sentiment and expect the markets to move higher.

Another approach is to place a trade a few minutes before the figure is released. While this could result in a healthy profit, it is something of a 'coin-flip' on market direction as the markets can sometimes initially react contrary to general expectations. 

Risk management enables you to close the position if that view proves to be incorrect. 

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).

Summary

There really is no silver bullet when it comes to trading the non-farm payrolls. The volatility involved means it can deliver a large short-term profit, but hand-in-hand with that also goes the risk of greater short-term losses, so placing risk-management orders can be very useful in this instance. If you've never traded the non-farm payrolls, you could start by trading in small amounts, with the appropriate stop-losses in place to protect your position.

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.

Our intuitive and highly customisable Next Generation platform offers a range of trading tools and analyst reports, including access to an economic calendar, client sentiment and a host of analyst reports and trading tools, so you can devise a stronger and more effective trading strategy.