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Trading the NFP (Non-Farm Payrolls)

By Adam Lemon

Adam Lemon began his role at DailyForex in 2013 when he was brought in as an in-house Chief Analyst. Adam trades Forex, stocks and other instruments in his own account. Adam believes that it is very possible for retail traders/investors to secure a positive return over time provided they limit their risks, follow trends, and persevere through short-term losing streaks – provided only reputable brokerages are used. He has previously worked within financial markets over a 12-year period, including 6 years with Merrill Lynch.

It’s the first day of the month today, and not just any old month, but an important month: September. Why is September important? Because during August a lot of bank and hedge fund staff are on holiday and volumes and directional movements in the market are usually thin. The 1st of September is the day that almost everyone is back at their desks after the summer (in the northern hemisphere!) holiday and its back to business as usual. For this and additional reasons, we can expect more excitement and opportunity to make money in the market after a fairly quiet August to begin now.

As for the other reasons – well, the start of a new calendar month also brings with it one of the most important regular economic data releases affecting the Forex market: the monthly U.S. Non-Farm Payrolls number, which basically shows how many new jobs were created over the previous month in the U.S.A. The main reason this is such an important event, is because it is a good indicator as to whether the economy is booming or beginning to slow down, which in turn suggests whether the Federal Reserve is on track to adopt a tighter or looser monetary policy, and this is a really key driver of the exchange rates of the USD currency pairs in the Forex market. A higher federal funds rate usually means a stronger USD, conversely, a lower federal funds rate usually means a weaker USD.

In the past, the release of this data on the first Friday of every calendar month was considered to be the number one most important scheduled event in the Forex calendar. In recent years, it has been overtaken by the FOMC Meeting Minutes Release, for reasons I will go into another time. Nevertheless, it is important!

In the current environment, the market is trying to decide when the next interest rate rise will be made. Consensus fluctuates and the strength of the USD tends to fluctuate in line with that. Context is everything. Early this year, the Federal Reserve were talking about making another rate rise during 2016, but then seemed forced to back away from that. However, in recent weeks a rate hike as early as this month has seemed to be on the table again, due partly to comments from Fed officials, and partly due to better than expected U.S. data. Therefore, with the context of everyone back from holidays and real trading getting started again, you can start to see why tomorrow’s release is a big deal that is likely to provoke a strong reaction.

The release takes place at 9:30am New York time.

If the number announced is much greater than 186,000 you can expect the U.S. Dollar to strengthen dramatically, especially against the Japanese Yen. If the number announced is much less than 186,000 you can expect the U.S. Dollar to weaken dramatically, especially against the New Zealand Dollar.

You should be careful when trading around this News release as movements can be dramatic and extremely volatile. Some traders try to enter quickly in the direction it started going just seconds or minutes after the release, but that is usually a very high-risk strategy. It can be better to wait 15 minutes or even up to an hour to see the market digest it, make its move and pull back before continuing.

Sometimes the market moves quite strongly in the direction of the move and then ends up reversing strongly against the content of the news.

Be careful and if you are going to trade it, keep positions SMALL.

Adam Lemon
About Adam Lemon

Adam Lemon began his role at DailyForex in 2013 when he was brought in as an in-house Chief Analyst. Adam trades Forex, stocks and other instruments in his own account. Adam believes that it is very possible for retail traders/investors to secure a positive return over time provided they limit their risks, follow trends, and persevere through short-term losing streaks – provided only reputable brokerages are used. He has previously worked within financial markets over a 12-year period, including 6 years with Merrill Lynch.

 

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