Learn Forex Trading for Intermediate Traders

Intermediate
Trading101
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20 Hours

Jobs Data That Matters in Currency Trading

The state of an economy depends on multiple factors. Some of them only hint at the changes to come.

Others tell you from the start if the economy is heading for recession or depression. The jobs data is one such data: it never lies, and when misinterpreted, it has devastating effects for traders that ignore what it shows.

Think of a society that, in theory, must function. You have children, active workers, and retirees.

In between, some people don’t want to work or just gave up looking for work due to difficulties in finding something suitable with their qualifications.

In any case, active workers need to make up for the needs of both children and older generations. Hence, low employment results in social unrest and high employment to social welfare.

For this reason, employment is a great indicator to look at when studying an economy. As explained in other articles part of this Trading Academy, part of Forex trading is interpreting the two economies that make up a currency pair.

Changes in employment levels, labor force structure, participation, etc., help traders make up their mind regarding the shape of an economy. With that info, they adjust the portfolio to the new reality and prepare for the next interest rate decision from the respective central bank.

Jobs Data in the United States

By far, the most relevant jobs data for Forex trading comes from the United States. There are three reasons why this happens.

First, the United States economy is the largest in the world. Giving the interdependency between different economies in the world, international trade, and globalization, changes in the employment level in the world’s largest economy will not pass unnoticed.

Secondly, the Federal Reserve of the United States (Fed) has a dual mandate. Before moving the federal funds rate or changing the monetary policy, the Fed considers inflation and jobs data.

More precisely, it has an inflation target and a mandate that includes job creation. Changes in both, result in the Fed twisting the interest rates. And that’s all that matters in Forex trading.

Finally, the U.S. Dollar is the world’s reserve currency. The financial system is based on the dollar as the central currency.

If we put everything together, the jobs data in the United States shows the shape of its economy and based on this information, the Fed adjusts the interest rates on the world’s reserve currency, the U.S. Dollar. Therefore, to accurately position yourself ahead of the curve in Forex trading, traders from around the world focus on the U.S. jobs data.

The Non-Farm Payrolls Release

Released by the Department of Labor every first Friday of the month, the Non-Farm Payrolls (NFP) doesn’t include farm workers, private household employees or employees active in non-profit organizations.

It is by far, the central economic release and one that results in exceptional volatility levels in Forex trading. To seize its importance, most NFP weeks have a lull price action until Friday comes and the numbers come out.

There is a strong correlation between the U.S. Dollar’s strength and the NFP release. The initial reaction is always in the same direction.

However, sometimes the devil sits in the details. For example, it is possible to have a solid NFP report and the U.S. Dollar to tank after the first reaction higher.

The answer comes from the possible revisions to the previous releases. In other words, if the NFP shows that the United States economy added 200k jobs, but the last two releases are revised down with 100k and 130k, the excellent news suddenly becomes terrible.

Hence, the initial market reaction will fade quickly, and a wave of selling the U.S. Dollar starts. Such an example happens quite often in Forex trading, so traders must be prepared for anything surrounding the NFP release.

The Unemployment Rate

Released simultaneously with the NFP number, the unemployment rate is another essential indicator for the Forex trading market participants. It shows the number of people out of work, and this is a good indication of the state of the economy.

Let’s play a logical game here for you to grasp the implications. It is considered that an unemployment rate below 5% is bullish for the currency. Why?

When this happens, typically the inflation will start to creep up. Businesses will have a harder time to find qualified workers, and therefore will pay more both to retain the current ones and to higher new employees.

If inflation rises, the Fed will become hawkish and will raise the rates sooner rather than later. Again, the interest rate level is all that matters in Forex trading, and the logical process explained here shows how every piece of information plays its part in the decision-making process.

The ADP Release

The ADP employment report refers to the private non-farm payrolls. To many, it is more relevant than the NFP due to the size of the U.S. private companies output in the United State’s GDP.

ADP comes from Automatic Data Processing, a company that compiles the data from about 400k business clients of ADP. The release comes out the same week as the NFP, but two days earlier, on a Wednesday.

Many tried to build correlation models between the ADP and NFP. Because the ADP comes earlier, the idea was to form an opinion about what the NFP shows.

However, any possible correlation seems to be random, for reasons we won’t cover in this article.

Traders also look at the employment component in the ISM Manufacturing and Non-Manufacturing releases, to form an idea about the NFP number. In general, any piece of economic evidence that points to improving labor market conditions will result in changes in the Forex trading plan accordingly.

Jobs Data in Other Parts of the World

Jobs data in other important economies refers mostly to the unemployment rate. While the United Kingdom and Canadian jobs numbers translate into higher volatility for the GBP and the CAD, the market reaction during the NFP release dwarfs the other jobs reports.

In the Eurozone, for example, it is almost a second-tier data. Of course, the unemployment rate has the same implications for the economy, but the European Central Bank (ECB) has a mandate that focuses solely on price stability and inflation. Hence, the unemployment rate release fails to create volatility in Forex trading.

In Canada, the jobs numbers and the unemployment rate come out at the exact time the NFP does. And, on the same day!

It makes it extremely difficult to handle a position on the USDCAD pair, as economic data from both sides makes the pair swing massively. Hence, some great advice is to avoid having open positions on the USDCAD pair until after the NFP and Canadian jobs releases.

Conclusion

Employment levels and the ability of an economy to create jobs are crucial economic aspects that matter in Forex trading. Retail traders focus mostly on short to medium term market interpretation, but even that sort of trading style’s result depends on the volatility created by jobs-related economic events.

All in all, together with inflation and the PMIs, jobs data helps complete the economic picture and provides traders with a reason to buy or sell a currency/currency pair.

One doesn’t need to be an economist to understand the releases. However, a basic understanding helps to form an opinion about what the implications are in Forex trading.