What is the NFP report?

The Non-Farm Payroll is a statistic researched, recorded and reported by the US Bureau of Labour Statistics intended to represent the total number of paid U.S. workers of any business, excluding the following employees:

1) general government employees
2) private household employees
3) employees of nonprofit organisations that provide assistance to individuals
4) farm employees

This monthly report also includes estimates on the average work week and the average weekly earnings of all non-farm employees.

The total non-farm payroll accounts for approximately 80% of the workers who produce the entire gross domestic product of the United States. The non-farm payroll statistic is reported monthly, on the first Friday of the month, and is used to assist government policy makers and economists determine the current state of the economy and predict future levels of economic activity. These numbers are the best way to gauge the current state of the US market as well as the direction that the economy is heading.

How does this impact the Forex Market?

Of all the world monthly economic reports, the monthly U.S. Non Farm Report (NFP) is the most highly anticipated and has the most dramatic impact on the currency market.
Additionally, the employment numbers provided by the report are used by the Fed to shape their interest rate policies. The health of the U.S. economy and interest rates translate to the strength or weakness of the U.S. dollar.

December NFP Figures

The figures for Non-Farm Payrolls in December blew away even the best estimates by economists, driving the dollar sharply higher against all of the major currencies. I was watching the release of the report at home on my laptop (4th December, 8.30pm Friday, Singapore time) and was a bit startled by the numbers. The market was expecting something between 125,000 – 130,000 (which means that employers shed this number of jobs). However, the reported figures were a mere 11,000!

The jobless rate for the same period also cooled down to 10.0% from 10.2% while job declines reached its slowest pace in about two years. Jobs cuts for the previous month were also revised down from 190,000 to 111,000.

Needless to say, the figures sent the markets into a frenzy, and caused the dollar to rally a fair bit.

Now, in the current economic climate, the dollar strengthens in 2 scenarios:

1) Bad news in the world which would trigger a “flight-to-safety” for the safe haven status of the dollar

2) Good economic data coming out of the US

Both these scenarios have played out now in the last 2 weeks, starting with the “bad news” of the Dubai Default and now with the strong NFP figures.

My Call

With the stellar performance of the US data, leading to the sharp rise of the dollar against most of the majors, I expect a strong continuation of the dollar as we move into next week – at least until traders decide what to do with the stats.

My call is that EUR/USD, GBP/USD, AUD/USD will continue to fall 1-2% next week and USD/JPY, USD/CAD to rise about 1%.

Will discuss this a bit more in detail on CNBC “Capital Connection” tomorrow.