Non-Farm Payroll (NFP) and effect on the USD

The Non-Farm Payroll (NFP) data is one of the most important news release that traders never seem to put off their minds. It is always released 1-2 days after the release of ADP Non-Farm employment change every first Friday of each Month.

It is referred to as the ‘Mother of Fundamentals.’

Let’s first take a look at ADP Non-Farm employment and see how it is related to NFP.

ADP is the estimated change in the number of people employed in the USA during the previous months excluding the farming industry and the government employees.

It is released 1-2 days before the release of NFP. most traders don’t put much attention to its release because it does not cause a big impact to the market instead used by traders to have a foresight about the NFP change.

NFP is the actual change in the number of people employed in USA during the previous month including the government employment but excluding the farming industry.

It is used to measure the net change in the number of people employed with in the US economy in jobs excluding those doing farming/agriculture.

They include those under manufacturing, construction and goods producing economic sectors and government employment. The changes in the NFP have significant impact on the US economy.

Farm jobs are excluded because they are seasonal by nature.

How NFP changes affect the USD

When NFP is positive/ greater than the previous, it shows that both the private sector businesses and the government are hiring more people due to improved economic conditions hence improving the people’s standards of living. This causes increase in demand of goods and services either domestic goods and from foreign countries.

As demand for USA goods and services increase, more people will come to invest in the country due to assured demand for their goods and services leading to more demand for the dollar hence growth in the economy as well as currency(USD) appreciation.

Whereas a fall or negative NFP shows that employers are letting go of more staff due to the poor economic conditions such as demand for high wages, increased cost of production etc.

When less people are employed in the USA, it increases government expenditure and reduces on taxes collected as government revenues from private business and industries. This may result to increased negative trade balances as well as government debt. Also when less people are employed in an economy like USA, there is less expenditure on goods and services due to limited incomes hence a slow down in the economic development. This may lead to fall in prices of the country’s goods and services thus discouraging investment in the country.

When this happens, foreign investors will liquidate their assets and investments and opt for more productive economies and those holding their money in the USD will start selling it off while buying higher yielding currencies. This leads to a further fall in the value of USD.

The traders and Fed FOMC are able to determine the health of the employment sector of the country’s economy by looking at NFP data release.

How do you trade NFP 

The Economic calendar always presents the previous data release, the forecasted data from economist and the actual data release.

To trade NFP, you have to first compare the actual news with the previous and forecasted data.

When the NFP news is higher than expected, the USD currency becomes stronger than the paired currencies in the market. Therefore you can buy the USD against the quote currencies or sell currencies quoted with the USD.

Buy currency pairs like USD/JPY, USD/CHF, USD/CAD and sell pairs like EUR/USD, GBP/USD, NZD/USD, AUD/USD.

When NFP data release is less than expected, it shows a weak USD relative to other currencies. Therefore sell the USD against the paired currencies and buy pairs quoted with USD.

Sell currency pairs like USD/JPY, USD/CHF, USD/CAD and buy pairs like EUR/USD, GBP/USD, NZD/USD, AUD/USD.

At times,the news release may seem to have no impact on the market. This happens normally when the actual news release is the same as the forecasted. This is because the big investors and traders have already adjusted their accounts as predicted so when the news released is the same as predicted it will have no great impact in the market.

As you plan to trade the NFP data release, take note of the other economic news released during the same period before you make any conclusions.


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