The United States jobs data is a crucial piece of economic data for any currency trader. Behind the numbers, the implications on the USD matter the most for any serious trader.
A currency trader will always perform better if he/she keeps the interest aligned with the central bank monetary policy. For this reason, traders try hard to anticipate the next central bank decision that affects the value of a currency.
Higher interest rate levels are associated with stronger currencies. Obviously, inflation plays an important role, and the previous statement remains true only and only if central banks succeed to keep inflation at bay. Or, at the two percent target, like many of them have in their mandate.
However, there is one central bank (and lately followed by the RBNZ – Reserve Bank of New Zealand) that looks not only at inflation but also at job creation before changing the monetary policy. That’s the Federal Reserve of the United States or the Fed, and its mandate is dual: to stimulate jobs creation in a stable inflationary environment.
One without the other is not possible for a full tightening or easing cycle to take place. Because the U.S. Dollar is the world’s reserve currency, changes in the Fed’s monetary policy create lots of volatility.
In the FX market, volatility creates opportunities, as traders speculate on the rise and fall of different currencies. Hence, understanding the factors that lead to monetary policy changes is essential for profitable trading.
Non-Farm Payrolls and the FX Market
NFP is such data. It is, by far, the most relevant piece of jobs data release monthly.
The acronym stands for Non-Farm Payrolls (NFP) and, as the name suggests, it shows the previous month jobs created or lost by the United States economy in all sectors, except the agricultural one.
Released monthly, on every first Friday of the month, the data is one of the most volatile in the economic calendar. Because most of today’s trading is automated, expert advisors and trading robots belonging to the high-frequency trading industry buy and sell in a fraction of a second based on the NFP actual number.
For the USD, the higher the numbers, the better. More jobs translate into more disposable income, which in turn stimulates consumption, the engine for economic growth.
Because it is part of the Fed’s mandate, the jobs data offers hints about what the Fed will do with the federal funds rate. Rising inflation in the context of job creation is a recipe for higher interest rates. Hence, for higher USD.
If inflation continually fails to reach the target and the economy doesn’t create jobs, the Fed will ease the monetary policy. The USD, as a consequence, will suffer.
It is of great importance to consider all jobs data release between two Fed meetings (Fed meets every six weeks to set the monetary policy) and see if it comes close to the Fed’s mandate. If yes, a move on the interest rates is almost inevitable.
Jobs creation drives economies higher. When an economy continually brings people to the working place, it creates wealth and distributes it across social layers.
The first place to see the impact is on the currency market. The currency will strengthen, the better the economy performs.
Due to the world’s reserve status, the USD is the critical currency on the Forex dashboard. And, the NFP, together with inflation (CPI – Consumer Price Index), offer traders a clue regarding the future of the federal funds rate in the United States.