Non-farm Payrolls

Economic indicators are key for many traders seeking to identify trends in economic growth. Of these, one of the most significant announcements is US Non-farm Payrolls.

In his latest research article, IG Index analyst Anthony Grech examines the effect Non-farm Payrolls has on the value of the dollar, and how trading strategies can be developed around these trends.

Below is a summary of the latest free report from IG Index. You can access the full version in the TradeSense Databank found in the PureDeal platform.

Why are US Non-farm Payrolls important?

There is a huge range of economic indicators available for analysis by market participants, each having a varying effect on the economy depending on the economic climate at the time.

Released at the beginning of every month, Non-farm Payrolls are regarded as an important guide to the health of the US economy. Plainly speaking, Non-farm Payrolls are America’s previous month’s unemployment rate, job growth and payrolls, in all non-agricultural sectors. Unsurprisingly in the US, these sectors account for workers responsible for 80% of the country’s GDP.

As such, Non-farm Payroll figures are an indicator for consumer spending, which furthermore means they are figures considered by the Federal Reserve when setting interest rates.

What it means to traders

When a trader looks at Non-farm Payrolls, they are interested in the consensus estimates for Non-farm levels, and actual Non-farm performance. It is on this comparison that they would base any decision.

The value of the dollar is the most obvious financial instrument that might be affected by an announcement regarding the performance of the US economy. If Non-farm Payrolls are rising and actual figures beat expectations, it is a good indication that the economy is growing and would give a boost to the dollar. Conversely, if actual Non-farm data is lower than economists' consensus estimates, traders may anticipate a weakening economy and sell US dollars. So, an instrument that might bear examining in light of Non-farm data is EUR/USD.

Non-farm figures and EUR/USD

Examining historical records for Non-farm Payrolls and EUR/USD reveals that the dollar does usually fall following worse than expected Non-farm results – but that the EUR/USD does not necessarily finish the day up.

For example, in both March and April this year, Non-farms were worse than consensus expectations. In March, the dollar immediately fell against the euro on the announcement, but later rebounded and ended the session stronger. In April, the dollar continually weakened and ended below its previous close. Clearly, Non-farm Payrolls have a significant impact on moving the dollar, but there is no simple formula in determining if dollar direction will be maintained throughout the day.

Short-term trading on EUR/USD

Data going back to December last year shows that the EUR/USD did indeed improve whenever Non-farms missed estimates, while it worsened when targets were surpassed. However, they also reveal that changes were seen most keenly in the first five minutes following the announcement, after which there would be a correction.

Long-term trading

It is perhaps in the long-term that the best strategies are borne out for trading EUR/USD based on Non-farm announcements. Looking at data from the last ten years or so, a decreasing trend in Non-farms was actually accompanied by a strengthening dollar, rather than a weaker one as one might expect. This is because the market is forward looking and acquires dollars at cheap levels, just before an upturn.

Trading on EUR/USD with IG Index

Whatever happens in the US, you can take a position on the dollar and a whole range of other dollar pairings with IG Index. In PureDeal you can stay one step ahead of the announcements with the Economic News, a timetable of the week’s economic announcements and reporting companies.

Take a more in-depth view on Non-farm Payrolls and trading the dollar in our specialist report from IG Index analyst Anthony Grech, available to all clients. Apply for an account and get set up in minutes.