What is Non-Farm Payroll and its importance?

What is Non – Farm Payroll(NFP)?

NFP represents the total number of paid U.S. workers, excluding proprietors, private household employees, unpaid volunteers, farm workers, and the unincorporated self-employed.

This measure accounts for approximately 80 percent of the workers who contribute to the Gross Domestic Product (GDP). Thus, it is the benchmark statistic used to determine the condition of the labor market. The nonfarm payroll statistic is released monthly, on the first Friday of the month, by the U.S. Bureau of Labor Statistics as part of the Employment Situation Report on the state of the labor market.

Why was the data named as Non-Farm Payroll?

The Bureau of Labor Statistics was founded in 1884. It began tracking industrial workers’ wages and eventually expanded to track unemployment and other aspects of the nonagricultural economy. Betsey Stevenson, an economist at the University of Michigan and former chief economist at the Department of Labour, said in the 1920s and ’30s, The Bureau of Labor Statistics ramped up its data collection as economic upheaval and industrialization spread. The Bureau of Labor Statistics statisticians utilized data from state unemployment insurance and New Deal government programs — programs that generally didn’t cover farm work and farmworkers.

Why it is important?

The importance of this data arises from the fact that the U.S. is the world’s largest economy and the U.S. dollar is considered as the reserve currency. Countries around the world peg the value of their currencies to that of the reserve currency. Many commodities like oil and gold are also priced at U.S. dollars.

The NFP report, therefore, often moves all of the financial markets, including forex, equities, interest rates, treasuries, and commodities. The impact often felt immediately after the announcement of the data. At times, it moves the market in a dramatic manner. Over time, the impact has reduced a little bit but the nonfarm payroll does generate a great deal of attention. This data generally creates important monthly trends.

The average hourly earnings (M/M) number, which forms a part of the report, measures the change in earnings a business or company will pay for labor on a monthly basis. This number is important because an increase in earnings will lead to consumers spending more, which will lead to raised inflation, and in turn will lead to interest rates being increased in the US. Again, this will draw funds away from emerging markets, as the higher yields offered in the US will be more attractive for investors.

How Forex trading impacted due to NFP?

When a strong economic report is released, the U.S. dollar gains against other currencies. On the other hand, a weak nonfarm payroll report indicates weakness in the U.S. labor market. This, in turn, puts pressure on the U.S. dollar and it weakens against other world currencies.

Which are the currency pairs that are affected due to NFP?

EURUSD, GBPUSD, NZDUSD, AUDUSD, USDCAD, USDCHF, USDJPY and AUDJPY.

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