The currency market or foreign exchange appeared with the United States decision to drop the gold standard. At the start of the 1970s, the Nixon Administration’s decision set the stage for what will become the most significant financial market in the world.
Also known as the interbank market it is the place where currencies from all over the world fluctuate against each other. Speculators quickly noticed the discrepancies in their values and the volatility and began taking long or short positions.
Nowadays, the foreign exchange market is the place were every trader tries his/her luck/knowledge. The task is as simple today as it was fifty years ago: to find which currency moves against another one and take a position on the market.
One of the easiest ways to find that is to compare different economies around the world. Based on the comparison, one appears in better shape than others. And, the place to test the outcome is the currency market.
Jobs Data in the United States
The secret ingredient in doing such an analysis is to use the same set of indicators. One of the most relevant indicators’ group belongs to the jobs market in the United States.
There’s a dual reason for that. First, the United States’ economy is the world’s biggest.
If there’s a problem in the States, the contagion will quickly spread in the rest of the world. The jobs market is the first place to look as it offers a glimpse into the health of the largest economy in the world.
Second, the Federal Reserve of the United States closely monitors the job market too. Unlike other central banks around the world, the Fed has a dual mandate: one-part deals with inflation, and the other one with job creation.
Therefore, the Fed’s responsibility is to bring inflation to target and, at the same time, to create jobs. Balancing the two is a delicate act that requires tuning the monetary policy decisions that affect the U.S. dollar.
The NFP (Non-Farm Payrolls) is the number one economic release to watch. Coming out every first Friday of each month, it creates both ranges and unprecedented volatility.
Before the release, the entire currency market waits patiently. Typically, the NFP week is full of ranges on all the USD pairs.
The moment the NFP comes out, algorithms buy or sell the USD based on how the actual data compares with the forecast. If the NFP beats expectations, the USD surges across the board.
And then there are some other details that retail traders must know. While the initial reaction belongs to the trading algorithms, savvy retail traders look at something else beyond the NFP number.
AHE – Average Hourly Earnings
Together with the NFP, the AHE shows the increase or decrease in earnings. This component has a robust inflationary expectation, so it comes to complete the Fed’s view to fulfilling its mandate.
Typically, a higher AHE and a lower NFP will create ambiguity on the Friday when the NFP comes out.
The lower, the better for the economy. And for the USD. Often it moves in the opposite direction with the actual NFP number.
Labor Participation Rate
Shows the number of people actively working. The higher, the better for the overall jobs data, and the USD.
Often, the NFP data for the previous months are revised higher or lower. It so happens that sometimes the revisions are enough to offset the positive or negative NFP release, creating confusion for the retail trader.
All this info appears on the labor report released every first Friday in the United States. All traders (and not only currency traders) watch the jobs data in the States for a single reason: when and if the Fed moves on interest rates, all markets around the world react instantly.
Hence, the jobs data offers an idea about what the Fed might do with the federal funds rate next. In the currency market, any clue is vital for the right positioning.