Non-farm payrolls and why it is important to forex traders
The US non-farm payroll (NFP) employment is probably the most influential statistic that affects forex trading.
The NFP figure consists of the number of jobs lost or gained during the past month, compared to the previous month. It includes statistics for goods, construction and manufacturing in the US.
It excludes private household employees, non-profit organisation employees and farm workers (from which the "non-farm payroll" is derived).
Non-farm payrolls are released every month on the third Friday after the week which includes the 12th of the month, which usually falls on the first Friday of the month. It is released by the US Bureau of Labor Statistics.Economic effect of the NFP
The influence of the NFP is based on the fact that it indicates whether more or less people were employed in the biggest economy in the world. The health of the global economy is largely dependent on the health of the US economy.If more people were employed, it confirms
- that businesses are hiring more people, and
- that more people in employment increases the money available to be spent in the economy, which fuels economic growth. This leads to an increase in dollars needed and the value of the USD usually increases.
A reduced NFP figure indicates the opposite and the USD decreases in value to its main forex partners.
Other NFP statistics
The report also includes other data that may move financial markets.The unemployment rate as a percentage of the overall workforce, which shows the overall health of the US economy.
The lower the unemployment rate, the better for the economy, but, when the rate falls below 5% (more than 95% of work seekers are employed) it creates the price/wage spiral. This economic spiral forms when the number of available people is so low that companies have to start paying bigger salaries to attract employees. The bigger salaries force companies to increase the prices of their services and goods, which in turn increases inflation.Which sectors of the economy lost or gained jobs.
This gives traders and investors an idea of which sectors of the economy may expand or contract. An example would be the housing sector.Average hourly earnings
This is an important part of NFP statistics because it shows whether salaries are increasing or decreasing, even when the same number of people are employed.
Whether people earn less or more for the same work, has the same economic effect as an increase or decrease in the number of people employed.Revisions of previous NFP statistics
It is an important indicator as it means that the numbers on which traders based their previous decisions, have changed and their decisions need to be adapted to account for the revised numbers.
The importance of the NFP together with the large number of institutions and people involved in currency trading, creates volatility before and during the release of the NFP statistics.
It is the most dangerous time for forex traders to be trading and slippage due to volatility as well as increased spreads, can hurt a trading account.
The increased volatility creates profitable opportunities for professional traders, but it is not advisable for amateur traders to trade during the volatile period.
FOMO (fear of missing out), and enticing promises of easy money by "system" salespeople, ensure that there are always enough amateurs in the market for professional traders with deep pockets, to prey on.
The release of the NFP is the best time to see which novice traders have learned the importance of patience – one of the most important, and difficult, skills to learn in fx trading.