Affected Currencies and Volatility
The currency pairs most directly affected by the NFP data releases are the major currencies traded against USD:
These currency pairs are where you will see the purest reactive response from the NFP release and where the best opportunities arise for trading the NFP.
Of these pairs, it is typical to see the biggest impact in EURUSD and USDJPY.
How are Currencies Impacted?
The typical response we see from these currency pairs is that a strong NFP number is USD positive, and so we see USD rise against these currencies. Therefore, the currency pairs on the left FALL and the currency pairs on the right RISE.
Further Currencies Impacted
Some of the other fall-out we can observe from the NFP release in the broader marketplace concerns the US Dollar’s inverse relationship with commodities. As commodity markets are priced in US Dollars, as the US Dollar gets stronger and thus more commodities can be purchased for the same amount of Dollars, the price of commodities goes down and vice versa.
So the two key implications here are firstly in the core commodities markets themselves such as copper, oil, gold etc., but also in the so called “commodity currencies”. For example, the currencies of countries whose principal exports are commodity-based, such as New Zealand, Australia and Canada. Whilst this dynamic can clearly be seen when expressed against the US Dollar, this commodities-linked effect can also be observed in currency crosses (e.g currency pairs where neither of the pair is the USD).
Chief among these is the AUDJPY. The AUDJPY is a brilliant example of the inter-market relationships driving currency trading, and in the context of the NFP release, is a great pair to watch for a tradable reaction.
As Australia has a commodity-based currency and is a major exporter, it suffers on falling commodity prices linked to a stronger US Dollar, whereas the Japanese yen, a predominantly importer economy, benefits from cheaper commodity prices, as shown below.
For the chart please refer to the video at 2:40
You can see in the above example that on the 6th March when the NFPs came out 264k vs 240k expected and we saw broad USD strength, so too AUD weakened against JPY with an initial reaction of over 50 pips, and a further subsequent decline.
To clearly display the volatility we typically see around this all-important news release, below are examples of the 2015 NFP data releases as seen in EURUSD and USDJYP on a 1-minute chart.
For charts please refer to the video at 3:17 and 3:35
We can see here that EURUSD dropped over 50 pips in one minute, while USDJPY jumped over 30 pips.
For charts please refer to the video at 3:41 and 3:53
Once again, we see sharp reactions in this example, with EURUSD falling another 50 pips in the first minute and USD JPY popping over 60 pips.
For charts please refer to the video at 4:03 and 4:16
The chart above is a great example of just how volatile this news release can be, with EURUSD sharply losing 100 pips and USDJPY spiking over 80 pips.
What we as traders are looking for when trading the NFP data are big moves that we can profit from. So whilst one month we may see a positive NFP number create 50 pips worth of sell off in EURUSD, we might see a positive number another month create 250 pips worth of sell off in EURUSD.
The key thing is assessing the magnitude of the number. What we want to know is whether the number is flat positive (in line with expectation), marginally positive (slightly about expectation) or extremely positive (well above expectation).
Knowing this is where we can spot the real opportunities in trading the NFP.
This again is where having great data comes into play. The Xenith platform gives us not only the previous data release figure along with the forecasted figure, which is available on any online Economic Calendar, but also the Reuters Poll number, which we explain in the next chapter.