NFP Could Spell Boom or Bust for USD

The U.S. economy is seen by some as the only hope for growth in the developed world. Deflation in Europe and Japan, as well as a “gloomier” outlook in the United Kingdom, has investors looking at the U.S. dollar as a store of value after the American economy posted impressive growth this year. The first quarter was a huge disappointment but it was blamed on bad weather and American gross domestic product contracted 2.6%. The U.S. roared back to life in the second quarter with an impressive 4.6% and the third quarter, while lower, continued the recovery narrative with a 3.5% annual rate. Most major gauges of the American economy are on the mend, but why so much emphasis on nonfarm payrolls (NFP)?

Published by the U.S. Bureau of Labor Statistics (BLS), the NFP report includes the total number of workers (excluding certain industries) that are added to the U.S. economy on a monthly basis. It is published the first Friday of every month at 8:30 a.m. Eastern Standard Time.

The NFP is the biggest report in forex. When the BLS releases the number of jobs created and the current unemployment rate, investors react instantaneously to the information. A rise in jobs and lower unemployment should boost the demand for the U.S. dollar versus other currencies. Vice-versa when lower than forecast job creation and a rise in the unemployment rate emerges. It reduces the demand for the U.S. dollar, thus it lowers in value versus other currencies.

A Measure of U.S. Economic Strength

The NFP counts the employees of durable goods, construction, and manufacturing companies while excluding farm workers, private household employees, and people working at non-profit organizations. This indicator can give an important insight on the overall strength of the American economy. The report’s importance heightened after the Federal Reserve set a target of 6.5% unemployment to signal economic recovery in December 2012. The U.S. central bank would then start cutting back on its $85 billion-a-month bond buy-back program. The current unemployment rate in the U.S. is 5.9% and the Fed just finished its quantitative easing last month.

The Fed initially linked the recovery of U.S. employment to its monetary policy timeline. Fed Chair Janet Yellen has since tried to diversify the impact of a single number (the unemployment rate) to carry such binary pass/fail grading of the economy and the actions of the central bank. Now the Fed looks at a dashboard pulling apart all the labor indicators to make sure it is a real recovery and not just a headline head fake. Yet the market will be looking for validation about the U.S. economic recovery.

October NFP Thought to be Strong

Retail sales came in with a weak print last month (–0.3%) and unleashed a selloff that the market bounced back from, but it will still linger in the minds of traders ahead of the October NFP. Weakness could unleash wave after wave of USD depreciation. Of note, a relevant data point was released this week when the ADP National Employment Report showed that the private sector added the second-highest number of jobs this year by 230,000 in October. However, a word to the wise: the ADP report does not necessarily directly correlate with the NFP. ADP’s report tends to run higher than the NFP, and it speaks to the different size of the sample it assesses.

Europe, Japan, and the U.K. are facing different challenges, but convincing the world about their growth is not one of them. The political bickering within the European Union continues unabated as member states and other global organizations press Germany to allow the European Central Bank to blast its monetary policy bazooka. Though Germany has yet to be swayed, the argument does give investors clarity that there will be low interest rates for the foreseeable future in the eurozone. In the U.K., political uncertainty vis-à-vis next year’s federal election is tying the hands of the Old Lady. Thus, the Bank of England will await the outcome of the 2015 vote to set what it views as the appropriate monetary policy for the U.K. Meanwhile, though Japan initially benefited from the Abenomics promise, it has since failed to yield its intended long-term results. That leaves investors, analysts, and policymakers looking to the NFP for guidance about the global economy, and if the world is truly ready for the end of record low interest rates.

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency
trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza