The non-farm payroll release is often considered the highlight of the economic calendar. The non-farm payroll is possibly the most closely watched indicator released at 8:30 EST, usually on the first Friday of each month. It is a data set from the US Labor Department and details the number of jobs created in the previous month in all sectors except the farming sector. Hence the name non-farm payrolls. The report also gives information on the unemployment rate, average earnings growth, the employment rate and productivity level. It is considered a very accurate report and is extremely current, given its release just days after the month ends.
The headline figure is the number of jobs created each month, but analysts also pay particular attention to the average wage growth. The non-farm payroll numbers are important because they form part of the Federal Reserve’s dual mandate, maximizing employment and moderating long-term interest rates.
Generally speaking when a solid number of jobs are created in a month the dollar tends to rally. Over the past few years a solid number of jobs is over 200,000 new non-farm jobs added in a month. This usually boosts the value of the dollar because more Americans working, means more Americans earning money, which means they should be spending more. This increases inflationary pressures on the economy, boosting the possibility of an interest rate rise. Increased odds of an interest rate hike will encourage more investors to buy the dollar, sending the price higher.
More recently, traders have been paying more attention to average earnings growth than the number of jobs added. This is because earnings growth is being considered a more direct indicator for future inflationary pressures and given the current sluggish state of inflation in the US, both traders and the Federal Reserve alike are looking to see a meaningful uptick in inflation. Over the second half of 2017 and this year to date, even if the number of new jobs added was high and comfortably above 200,000 but the average earnings less impressive, then traders have actually been selling out of the dollar.
Some traders like to trade the non-farm payroll release, because of its volatility, whilst some traders like to side step trading the release for the exact same reason. The currency pair which is most affected by the non-farm payroll is the US dollar versus the Japanese yen, USD/JPY. But the other majors, such as the pound versus the US dollar GBP/USD and euro versus US dollar EUR/USD often experience big swings surrounding the non-farm release.
If you do decide to trade the non-farm payroll, look at other data across the month, such as the ADP private payrolls and the manufacturing data for clues as to whether a high than forecast figure is expected. Additionally, given the swings which tend to occur make sure you keep you keep a close eye on your risk management.