Trading the NFP – Tips and Tricks to Know in Advance

Hello there, this is, and this video deals with the Non-Farm Payrolls release or the NFP. This is, if not the most important, one of the most important pieces of economic data coming out of the United States – the world’s largest economy, having the world’s reserve currency.

How Does NFP Affect the Market

how-does-nfp-affect-the-marketIt means that this piece of information, the NFP, matters for the entire investing community, and the NFP is released every first Friday of the month. Sometimes when there is a holiday the NFP is delayed for the next week or comes out a bit earlier, but normally it is the first Friday.

For instance, this is the NFP price action on the August 7th – the date when the NFP for the month of July it was made public. During the NFP release there is a special price action on the USD pairs, in the sense that the entire NFP week is different.

On a Wednesday, you have the ADP payrolls, or the private payrolls. These are the jobs created in the private sector in the United States. While there is not a direct correlation between the NFP and ADP, there is still some clues about what the NFP might do.

Economic Calendar

economic-calendarThe economic calendar shows the economists’ expectations about the data and if the ADP beats expectations then the likelihood is that the NFP will beat expectations as well. The market’s reaction on the NFP release is very strong because trading algorithms, robots, are instructed to buy or sell in a fraction of a second based on the NFP data. If it beats expectations that is positive for the USD, if it comes below, let’s sell the USD, and it means positive for the EURUSD.

Also, during the NFP week, the economic calendar has at least one ISM release coming out that week. ISM stands for the Institute for Supply Management and calculates the two PMIs in the United States – manufacturing and non-manufacturing.

The focus here is to dig how did the employment component in the sector performed in order to anticipate the effect on the NFP. For example, if the ISM Non-Manufacturing shows the employment component of the services sector contracting, that is negative for the NFP in the sense that expectations are that it will miss expectations, not a good sign for the USD.

Then you have the initial and continuing claims one day before the NFP, on Thursday. These are pieces of information from the labor market, coming out weekly, revealing the number of people that apply for unemployment benefits in the previous week. The higher the number, the worse for the currency.

Traders already have an idea about the NFP. So why do the markets react so strong when the NFP comes out? The answer comes from trading algorithms, as mentioned earlier, and the Fed’s mandate.

Unlike other central banks in the world, that have a mandate that revolves around the 2% level, the Fed has a dual mandate – it moves the federal funds rate based on two aspects: inflation (i.e. price stability) and job creation. So the Fed needs to balance the data from the inflation front and the jobs market front in such a way to set the federal funds rate, that affects the value of the currency.

So during the NFP, up until the Friday’s release, there is uncertainty. Something like what happened this August happens most of the times. This is the NFP week, and then we had the opening on Monday, when the EURUSD made a new low and recovered. Then Tuesday it attempted at the lows and then recovered, more or less hovering around the price action of the previous week. The EURUSD continued to the upside on Wednesday when the ADP came out. On Thursday it made a new high and retraced here and then came the NFP. Most of the price action on Friday happened after the NFP release. Until the NFP, during the London session, there was little or no price activity and with the NFP day the EURUSD retraced the gains of the week and closed the week where it closed the previous one. Therefore, the NFP holds the key not only for the actual NFP week, but also for what follows after that.

To trade the NFP, think of positioning for a period beyond the NFP horizon. Using scalping trading strategies during the NFP is tricky because slippage may affect the execution of a trade.


conclusionTo sum up, the NFP is very important because it affects the Fed’s mandate of job creation; it comes out on every Friday of each month; during the same week, two days earlier, the ADP offers a clue about what the NFP may show; focus on the employment component of the ISM releases; focus on the initial and continuing claims; keep in mind the expectations of the implications for the Fed – higher NFP is positive for the currency because the expectations are that the Fed will grow hawkish.

Thank you for being here. Bye bye.