Introduction to Non-Farm Payrolls
A classic example how how the forex market is moved can be found in the non-farm payroll (NFP) numbers published each month by the US government. The NFP number is a seasonally-adjusted estimate of the number of non-farm jobs that were added (or lost) during the previous month. They are more reliable than the weekly jobs numbers for a variety of technical reasons that aren't important to us here. There are several other ways of estimating changes in employment levels, but the monthly NFP numbers are seen as by far the most reliable.
Deciphering the Numbers
An increase in jobs suggests the economy is growing, which means that, all things being equal, there will be more demand for dollars. Investors, for instance, who were thinking of buying US assets will feel more comfortable doing so. The NFP will usually show an increase in jobs. It is estimated that the economy needs to create about 125,000 new jobs a month in order to keep pace with population growth and immigration. So, even though it may seem like a good thing the economy produced, say, 85,000 new jobs last month, it is entirely possible that that result will actually push the unemployment level up .1%.
Because the NFP numbers are watched so closely, they take on a disproportionate influence. This is an important concept to keep in mind. If no one was watching, slight departures in the report from what was predicted would have relatively little effect on the economy, and thus on the forex markets. However, the numbers are read by forex traders like a diviner reads tea leaves to predict the future.
So, if the numbers come in higher than predicted, everyone knows that people are going to be scrambling to buy dollars. Let's say it was expected the NFP numbers were expected to be +200,000. In the days leading up to the release of the report, the markets will have priced in something close to that expected change. But then the numbers come in at +350,000 – anything above 300,000 is seen as truly strong growth. At that point, the traders that had already bought US dollars will make a whole lot of money, as everyone else rushes to catch up.
Because the US economy is so important to global economic health, big changes in the NFP are often looked upon as a harbinger for the rest of the world's economy. If the numbers are really bad, for instance, investors from all over the world may retreat to gold or other commodities that provide safe havens in times of turmoil.
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A classic example how how the forex market is moved can be found in the non-farm payroll (NFP) numbers published each month by the US government. The NFP number is a seasonally-adjusted estimate of the number of non-farm jobs that were added (or lost) during the previous month. They are more reliable than the weekly jobs numbers for a variety of technical reasons that aren't important to us here. There are several other ways of estimating changes in employment levels, but the monthly NFP numbers are seen as by far the most reliable.
Deciphering the Numbers
An increase in jobs suggests the economy is growing, which means that, all things being equal, there will be more demand for dollars. Investors, for instance, who were thinking of buying US assets will feel more comfortable doing so. The NFP will usually show an increase in jobs. It is estimated that the economy needs to create about 125,000 new jobs a month in order to keep pace with population growth and immigration. So, even though it may seem like a good thing the economy produced, say, 85,000 new jobs last month, it is entirely possible that that result will actually push the unemployment level up .1%.
Because the NFP numbers are watched so closely, they take on a disproportionate influence. This is an important concept to keep in mind. If no one was watching, slight departures in the report from what was predicted would have relatively little effect on the economy, and thus on the forex markets. However, the numbers are read by forex traders like a diviner reads tea leaves to predict the future.
So, if the numbers come in higher than predicted, everyone knows that people are going to be scrambling to buy dollars. Let's say it was expected the NFP numbers were expected to be +200,000. In the days leading up to the release of the report, the markets will have priced in something close to that expected change. But then the numbers come in at +350,000 – anything above 300,000 is seen as truly strong growth. At that point, the traders that had already bought US dollars will make a whole lot of money, as everyone else rushes to catch up.
Because the US economy is so important to global economic health, big changes in the NFP are often looked upon as a harbinger for the rest of the world's economy. If the numbers are really bad, for instance, investors from all over the world may retreat to gold or other commodities that provide safe havens in times of turmoil.
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