A Glimpse At Forex High-Volatility Events: Non-Farm Payrolls (NFP)
There are a number of factors that cause ripples in the forex market. The ripples provide the means for traders to earn a profit through analysis or overall trends. Some of these events are predictable while others may come out of nowhere. Long-term traders have to learn to be wary of unpredictable news events. For example, the earthquake that hit Fukushima resulted in a massive drop for the JPY as investors moved their money out to protect investments from the potential economic fallout. On the other hand, there are predictable news events that traders must either weather or embrace.
This series of posts is going to look at the latter. There's no better place to start than with the United States Non-Farm Payrolls (NFP).
What is Non Farm Payrolls (NFP)?
Economic growth indicators are an important part of fundamental analysis for traders. The Bureau of Labor Statistics releases an employment report at 8:30 A.M. (Eastern) on the first Friday of every month. That report covers the data of the previous month. The BLS report includes job growth, unemployment data, and payroll data; among other things.
The NFP data is considered to be the most important statistic and news event. This data reflects the total number of paid United States workers in any business except for employees of non-profits that provide individual assistance, farm employees, general government employees, and employees of private households. The NFPs are an excellent metric for determining the actual rate of recent inflation and economic growth.
This report provides a basic idea of net job creation in the United States. Job creation at least touches all other angles of a country's economy. It demonstrates consumer spending and confidence, business creation, affects GDP, and quite often garners a policy response from the U.S. Federal Reserve.
The NFP report also includes unemployment data, which may be used as a projection of relative economic health. A lower unemployment rate typically spurs on a higher rate of inflation as companies acquire skilled workers.
Why is it "Non-Farm" Payrolls?
The choice to not include certain industries of workers is due to the lack of consistency these industries often have. Farms, for example, may employ many temporary workers through their most active months. Non-Profit Organizations are another good example as funding can change the number of people they employ at any given time.
These industries are cut out because it was determined their expanding and contracting would cause ripples in Payrolls that did not necessarily reflect the situations of more consistent businesses. With as closely as this report is watched, it would cause false volatility of the USD.
How does it affect the Forex market?
The overall effect of the data will largely rely on the difference between the expected data and actual data. An actual number that is higher reflects growth in the U.S. economy and hints towards a stronger USD. A lower number is the opposite.
Analysts will be looking at the long-term data of the NFPs. Drastic growth over a short period of time may increase inflation which can have an adverse effect on currency value.
The NFPs are closely monitored by many financial entities. There are traders that will buy on a positive report or sell on a negative report as a strong indicator of what will be coming in the next month for the USD. That creates potentially choppy conditions for any trader holding a USD position when this particular report is released.
Other currencies are often affected by the NFPs as major movements of USD affect their paired currency. One cannot assume that any currency will be "safe" for this announcement.
How will NFPs affect positions?
The drastic movements that the NFPs can facilitate need to be accounted for by traders on most time frames. Scalping and short-term positions are less likely to be open around the period of volatility. Traders on hourly time frames or greater may be subject to the whiplash that may come.
It's not just the USD that can be affected. A lower percentage than the projection may inspire investors to bolt to different currencies to preserve their holdings. That means pairs involving currencies other than the USD, like the GBP, EUR, or JPY; may experience increased volatility as a result.
Long-term traders will want to err on the side of caution. It's impossible to predict what the reaction is going to be ahead of time. News events like the NFP don't follow trends. They are anomalies that cause drastic movement that may not last. It's not uncommon to see a large, wicked candlestick on a NFP announcement day as price surged and retreated back towards the original position.
A Stop Loss is going to have to be pretty far out to accommodate the 100+ pip total movement potential. Some traders may opt to stay in their trades if they have already banked profit or are at break even to gamble on the direction. That will entirely depend on strategy and risk tolerance. It's not a good idea to hold a position that isn't profitable or at breakeven because the chances of being taken out of the trade are great.
Trading The Non-Farm Payrolls
Short-term traders and scalpers are in a great position to try and bank some pips off of this predictable volatility. Long-term traders that want to ride the wave of volatility will want to look into "news trading strategies" that are geared to just that short time period. Many of these trading strategies will either seek to capitalize on the initial volatility or in the potential for a rebalancing shortly thereafter.
Trading the NFPs is a high-risk activity and should only be undertaken by traders comfortable with high volatility, high risk trading.
This post was written by Daniel Lindsay.
Follow him on Google + and check out his other blog posts on MahiFX.
Stay up to date with all the latest forex news by subscribing to our daily score emails. Click here to get signed up.