Nonfarm Payrolls

Nonfarm Payrolls (NFP) is the single biggest monthly economic news indicator released out of the United States, usually on the first Friday of every month.

Reported by the US Bureau of Labor Statistics, the NFP measures the increase or decrease in the number of people employed during the previous month, except for those working in the farming and agriculture industry.

The NFP can also be referred to as an Employment Change, and is the most anticipated monthly report.

As it's released at the beginning of each month, it typically causes huge movements in the financial markets, especially in the foreign exchange market.

Traders care about the NFP because the creation of jobs itself is one of the most important indicators of consumer spending, a vital barometer that underpins the country’s economy.

NFP does not include farming jobs, primarily because these jobs are markedly seasonal, which can cause inconsistent reporting.

Essentially, it represents all business employees (excluding general government employees), private household employees, and employees of nonprofit organizations, accounting for about 80% of the workers who contribute to the GDP.

Prior to the actual figure being released, industry experts make an educated guess as to what the figure will turn out to be, known as the “expected figure” or “forecasted figure”.

Thus, if the actual figure released is greater than what’s expected, then there are more people employed than initially thought, which is great news for the economy.

Such an outcome results in traders investing in the US dollar, giving it strength. Likewise, if the actual figure is lower than the forecast, the US dollar typically weakens.

However, this is by no means a hard and fast rule, as there are other news reports coming out at the same time, plus revisions can make things extremely haphazard.

How to Trade Nonfarm Payrolls

Often, traders wait in earnest (or trepidation) for the release, with considerably less trading activity just before the release, often called the calm before the storm, as a price squeeze takes hold.

Some traders actually trade these huge spikes (known as news traders), by entering the market immediately after the figure is released, and just before the price makes its move.

Depending on how much divergence there is from the expected figure, retail news traders try and take advantage of the fact that there’s guaranteed to be huge movement.