Non Farm Payroll Pt. 2 - Analysis

This article is an extension of last week’s, in which we attempt to validate our theoretical understanding of Non Farm Payrolls against historical data. I’m looking at the performance of a chart for an entire month after the NFP announcement, analysing movements until the next announcement rolls around. My methodology and presentation is as follows:

I begin by taking each month’s announcement, which relates to the expected change in employment as a result of the previous month’s economic performance. I note the forecasted value, the actual value and the net difference. This net difference will be used to make a prediction about the expected value of the Dollar -> a positive difference means a rise in employment and subsequently a rise in the value of the Dollar, a negative difference means a fall in employment and subsequently a fall in the value of the Dollar. I then include the chart of the next month’s GBPUSD movements alongside some comments on the performance. Since the NFP release occurs at 08:30 on the first Friday of every month, the chart is on a 30 minute time period.

It should be noted that the time on the x axis of all the graphs is in GMT, since this is my current timezone.

You might be wondering why we look at the net difference as opposed to the actual figures. Surely the figures, since they are directly related to the economy, are what we should use to validate the application of our theory? Well, technically you’re right, but we also have to factor in why these charts move. Ultimately, it’s the retail investors and institutions that monitor these announcements and make a judgement call as to what the figure means to them. The easiest way for them to judge this is as a comparison to the forecast. We therefore look at the difference because we expect this to be a strong indicator of sentiment following an announcement. We know an announcement that falls short of the forecast, despite being positive, will leave investors disappointed and they will reflect this in their trading decisions.

The key to this analysis is summarised in the form of 2 questions:

1. Does the GBPUSD move in the direction we expect it to after an NFP announcement?

2. If it doesn’t, is there a significant piece of news related to the other economy (in this case the UK) that might override our theory from NFP?

April 2021 Release (March 2021 Performance)

Forecast: +647,000

Actual: +916,000

Net: +269,000

Expected Result: Increased value of USD (GBPUSD should fall)

Result & Comments: Over March, we saw US employment rise by 916,000 as it continues to recover, alongside the rest of the world, from the coronavirus pandemic. This actual figure was significantly higher than the forecast, hence we see the value of the USD expectedly rise on the chart below. This is a delayed movement, as we see the chart reach its minimum value 10 days after the announcement but perhaps more importantly, after a 0.6% initial rise. This movement appears to be the end of a bullish GBP move that began in the previous month. If we look at articles around the first week of April related to the UK economy, we see a lot of information surrounding a positive economic outlook following the success the UK is seeing in its vaccination program.

March 2021 Release (February 2021 Performance)

Forecast: +182,000

Actual: +379,000

Net: +197,000

Expected Result: Increased value of USD (GBPUSD should fall)

Result & Comments: We do see the GBPUSD move down in the direction we expect, but not before it initially rises by a greater amount. From an economic perspective, we expect a delay between rising employment and a change in the value of a currency, as we saw in the previous chart, and this does occur again here in this chart as the minimum point is reached on the 25th March. The initial rise can be attributed to UK unemployment levels, a statistic released quarterly that indicated a fall of 0.1% in the most recent announcement, hence stimulating a bullish move for the Pound.

February 2021 Release (January 2021 Performance)

Forecast: +50,000

Actual: +49,000

Net: -1,000

Expected Result: Decreased value of USD (GBPUSD should rise)

Result & Comments: This is a very interesting chart because whilst we do have a net rise in the levels of employment in the US, this figure fell below expectations and ultimately when it comes to translating this to chart movements, this is a perfect display of how investor reaction determined direction. Ultimately, this is a disappointing NFP announcement and investors made this clear. The value of the USD takes a huge dip as the GBPUSD rises for more than half the month. This is the biggest gain we see in any of our charts, 3.41% movement from the announcement. It goes to show here that investors may be far more reactive to negative news than they are to positive news.

January 2021 Release (December 2020 Performance)

Forecast: +71,000

Actual: -140,000

Net: -21,000

Expected Result: Decreased value of USD (GBPUSD should rise)

Result & Comments: January performance appears to eventually go in the direction we expected it to, but the market appears to have been ranging for the entire month. The likely scenario in January 2021 was probably along the lines of both countries having severe problems re the covid pandemic and as such, the economy wasn’t being hugely prioritised nor was there a country that appeared to have an edge over the other. The market does eventually sway towards the UK, but the volatility here and lack of direction for the majority of the month indicates that, from a trading perspective, we might have struggled to hold a profit here.

December 2020 Release (November 2020 Performance)

Forecast: 469,000

Actual: 245,000

Net: -224,000

Expected Result: Decreased value of USD (GBPUSD should rise)

Result & Comments: Over the course of December, we expect GBPUSD to rise, but within the first week, we see a 2.77% fall. The big story with the UK economy in December 2020 was Brexit. At the start of the month, it was looking increasingly likely that the UK was headed towards a no-deal Brexit, which resulted in an extremely gloomy outlook for the UK economy. The potential long term effects of this was deemed far more significant by investors than the NFP announcement and as such, the GBPUSD tanked. As we reached the end of the month and the UK were able to agree a Brexit deal, the outlook improved and we saw the GBPUSD return to a more expected direction and one in line with our NFP announcement.

November 2020 Release (October 2020 Performance)

Forecast: 600,000

Actual: 638,000

Net: +38,000

Expected Result: Increased value of USD (GBPUSD should fall)

Result & Comments: We see a movement here that is perfectly in line with what we might expect after the NFP announcement, so much so that the final datapoint in this chart is a new high. This is likely to have been compounded by a fall in the value of the Pound, caused by the start of the second lockdown in the UK.

So what does this analysis tell us? Well, in a phrase, something, but not everything. We can’t expect NFP to tell us everything about an economy and as expected it doesn’t. It does however, assuming nothing highly unusual from the non-US economy, affirm our understanding in the theory that employment and the value of a currency do move in the same direction. One of the significant conclusions we can make from these charts however, is that the NFP announcements can be easily overriden from the perspective of investor sentiment. If investors see a significant piece of news that might sway the value of a currency in the opposite direction, they might follow that. We saw that significant events such as Brexit and Covid lockdowns have a far greater impact than employment changes and this is something we have to be aware of when we are evaluating economies. A lot of these other effects are very specific to the current situation we continue to face and so in the long term, it will be worth to continue the analysis using pre-Covid data points to understand other external factors that could diminish the effect of NFP.