As I've noted
before, I don't trade news events like the Non-Farm Payroll. One of the main reasons is that I prefer to be asleep when most of them happen. Another big reason is that I find it difficult to interpret what they mean in the 10 seconds or so you have to make that decision and place a trade. So if I ever do trade the news in a serious way it'll be on an entirely automated basis with
FX Engines.
But that's doesn't mean I ignore these events entirely, and a recent email from a reader got me thinking even more than usual about the NFP report. The reader was curious about why the dollar strengthened after weaker-than-expected employment numbers, which I thought was an excellent question, and tried to answer as best I could. Here's our Q & A exchange about what it all means:
Q: "I am very confused with Friday's dollar action. The NFP report seems negative to me, no matter how you look at it. If the consensus was 120k and the actual figure is 50k... well that's a huge decrease to the negative side. Then, it was explained to me that the previous month's numbers were inaccurate and the two months averaged together equates to 120k. Again, this to me is negative for two reasons.: 1, last month's report was wrong = negative 2. if last month's number was actually much higher than 120k than the drop from last month to this month at 50k would be even worse!
Yet the dollar strengthened. I am confused. If you could share your thoughts on the event, if would be greatly appreciated."
A: "Frankly, I usually find market reactions to the NFP and other events pretty confusing too, which is why I generally stick to statistical and technical analysis of price movements (if X and Y happened today, Z will happen tomorrow 60% of the time, etc.)
However, in this case I think I know why the dollar strengthened: higher employment tends to be correlated with higher inflation, and inflation has been a big worry in the markets lately. The closer the economy is to full employment, the higher the upward pressure on prices as consumers have more in their pockets to spend. This relationship is known as the
Phillips Curve.
On the flip side, slowing employment growth actually helps reassure traders that inflation is under control, which leads to greater confidence in the dollar. This also leads traders to conclude that the Fed is less likely to raise interest rates to control inflation, and might even start lowering them again - another big reason to buy the dollar.
However, this doesn't mean the market will have the same reaction down the road. If a future NFP report showed continued weak employment and inflation had ceased to be much of a concern, I wouldn't be surprised if traders began to have more serious concerns about the fundamentals of the US economy and the dollar weakened as a result. Market reactions to news events are highly dependent on the context within which the events occur, so the same news could produce wildly different reactions in different contexts."
That's my amateur interpretation, at least...what's yours? I'd be very interested to hear how other traders interpret the NFP, so feel free to post your analysis in the comments below!
Related topics:Why I don't trade on economic newsFX Engines launches news trading toolsRelated links:Non-Farm Payroll ReportPhillips CurveFX EnginesLabels: Events, News, Non-Farm Payroll, Psychology
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