Trading the non-farm payroll data

Unemployment figures in the world’s most powerful economy have a particularly profound effect forex markets and can provide either highly profitable trading opportunities or very large losses. The reason why such significance in placed on these figures is because they are considered the benchmark not only for the health of the global market but also as an indication of future changes in monetary policy for the US dollar. If the US economy has low unemployment both the potential for growth and inflation suggests that the Federal Reserve may take a more conservative approach to its interest rate policy in the medium-term. Strong employment figures may also create high short-term demand for the US dollar, reflecting US production and a strong supply of dollar-valued goods on the global markets. This, however, is usually balanced in the medium-term by the increase in demand for foreign imports by a wealthier US workforce.

Compiling the data

Non-farm payroll data is compiled by the Bureau of Labor Statistics and represents the overall employment of around 80% of the workforce. As the name suggests, this does not include farm employment data or several other forms of employment such as private household employment but gives a fair analysis of the general employment situation in the US. Prior to the release of these figures, leading economic analysts make their predictions in order to provide the markets with an indication of what to expect. These expectations add to the impact of the release of non-farm payroll data in cases where the figures fall short or exceed the anticipated monthly unemployment level.

Trading payroll data?

We can see that the interpretation of the Non-farm payroll data can be different depending on the timeframe that each forex trader approaches the news release. This also explains why in the immediate aftermath of the news, which is released to the markets on the first Friday of every month, all forex pairs become particularly volatile with high volume and large price swings. Trading during and after the release of the data is therefore something that some forex traders avoid completely. However, many traders also take advantage of the tendency for forex movements to become exaggerated in the ensuing chaos and look to gain on corrective trades or counter-trend positions when forex markets “spike” immediately after the release.

A word of warning…

Trading the non-farm payroll release is not for the feint-hearted. Not only do the values of forex pairs react to this, but there is also very few safe-havens for open positions during this time. Due to the fact that all forex pairs are connected and correlated to some degree, the knock-on effect will result on almost all pairs being influenced by this news release. Once a trader is involved in the fast-moving volatility that follows the news, it may also become more difficult to have your orders filled at the price you want. This is known as “slippage” and the risk is increased when markets move too quickly for a quote to be executed. Whilst this may not be problematic for positive trades, in regards to the execution of protective stop-losses this can be disastrous if they are executed long after price has passed the desired price.

Waiting for the storm to subside

Non-farm payroll data sets the tone for the entire day trading but the volatility tends to reduce 15-30 minutes after the initial reaction. Many traders look to wait in the immediate aftermath and look for opportunities, or return to their trading strategies, once the markets begin to consolidate and return to more normalised behaviour. For those who specialise in news-related trading, however, the gains made from skilfully playing the release make trading the non-farm payroll data a very central part of their monthly trading strategy.


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