Non-Farm Payrolls – Forex Trading Tips
March 4th, 2010 Posted in Chief Analyst Special Report, The US Dollar
The start of each new month brings with it one of the most significant economic reports: Non-Farm Employment Change, also known as Non-Farm Payrolls (NFP). The point here is not to inundate you with information about the NFP report which you already know. The purpose is to provide an interesting analysis about how to utilize the price movement of the EUR/USD following this release.
Two approaches can be used when considering such news events. The first is the straight-forward “forecast vs. actual” results. The second approach takes outside factors, primarily the ADP Non-Farm Employment Change estimate, into consideration when viewing the results.
Over the past year and a half, the early release of ADP’s Non-Farm Employment Change estimate has been strangely inaccurate due to the unpredictability of the employment market during the financial crisis and recession. However, as I’ll show in this article, we are beginning to see a return to normalcy with ADP’s predictive power, and we can use that to make some quick gains in the forex market trading the EUR/USD.
I’ll start with the first approach. Friday’s NFP forecast is for an employment change of -56K, meaning 56,000 jobs are expected to have been lost in the non-farm employment sectors of the economy last month. If expectations are better, such as a reading of -10K, the USD will likely appreciate, meaning the EUR/USD will go down. This is the first approach to Friday’s release.
On the other hand, the previous 2 months’ release of ADP’s Non-Farm estimate have been more inline with the actual release of the NFP report the following Friday. I’ve provided the numbers below to help explain:
- January’s ADP forecast: -74K
- January’s ADP actual results: -84K
- January’s NFP forecast: -3K
- January’s NFP actual results: -85K
- February’s ADP forecast: -31K
- February’s ADP actual results: -22K
- February’s NFP forecast: 10K
- February’s NFP actual results: -20K
The important thing to take away from the above information is the following. January’s ADP forecast and actual results are more or less the same, and the EUR/USD’s price movement following this release was an upward movement. The actual results of the NFP report the following Friday was inline with ADP’s actual results, and the result was that the EUR/USD continued the trend established by the ADP results.
In February it was the exact same. ADP’s actual results were inline with the NFP report’s actual results and the EUR/USD trend which was established by the ADP was continued, despite the NFP results being drastically different than the NFP forecast.
Now, looking at this month’s expectations we can see that Wednesday’s ADP estimate is calling for an employment change of -20K, but the NFP forecast is calling for a change of -56K. This gives us two conflicting points of view. Should the NFP’s actual results come inline with Wednesday’s ADP report, it means that the actual results are better than forecast and should help the USD gain strength, meaning the EUR/USD will go down.
However, Wednesday’s ADP report pushed the USD down since it was worse than expected. If the NFP report comes inline with ADP’s estimate, the USD should continue Wednesday’s trend, meaning the EUR/USD will go up.
In my opinion, it appears as if the following may happen. Should Friday’s NFP report come inline with Wednesday’s ADP figures, traders will likely see a sharp jump in the strength of the Dollar – meaning the EUR/USD will drop rapidly as the better than expected results boost the greenback – but this will be followed by a correction, and the pair’s overall daily movement may actually be in an upward direction since it is likely that it will continue Wednesday’s established trend.
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Tags: dollar, Employment Change, employment report, EUR USD, EUR/USD, Euro, Forex, forex analysis, forex explained, forex news, Forex Trading, nfp, Non-Farm Payrolls, trading tips, Unemployment, USD
