Trading the News: Non-Farm Payrolls, November 3rd 2006

By: David Thorpe
Submitted: 2007-01-17 16:17:35
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First, the Figures

If you cast your minds back to last month (or take a look at our account of the October 2006 report) you will remember that the headline figure was much worse than expected. However, monthly revisions to the data from August, a better than expected unemployment rate and annual Non-Farm Payroll revisions (very few were aware of these annual revisions) overshadowed the headline data. To be honest this is fairly rare because the headline figures generally take centre stage but it was a good example of why traders should pay attention to all data releases and be aware of any potential conflicts that may arise. For example, strong revisions to previous data conflicted with September’s poor headline figure.

After hearing that it is fairly rare for the headline figure to be ‘out-influenced’ you may be surprised to read that the same occurred with the November report. We had further revisions to the August data from 188K to 230K. There was also a revision to September’s data; the extremely low figure of 51K was revised up to 148K. The unemployment rate was a further surprise coming in at 4.4%, a five year low! This positive data was enough to offset the disappointing headline figure of 92K versus expectations of 125K.

Price Action

By all accounts the price action caused by the November report was very similar to what we saw last month. As you would expect the headline figure is released a fraction of a second before any of the revisions, this caused a rapid spike higher in the EURUSD rate. This spike reached a high of 1.2792 and reversed immediately. Revisions and better than expected unemployment data became the focus causing the dollar to rally to a low against the Euro of 1.2682. Picture: http://www.passion-trading.com/Articles.TradingTheNews.NonFarmPayrollsNov2006.htm

Some Simple Economics

Why does positive employment data influence the foreign exchange market the way it does? Basically individuals with jobs have a greater amount of disposable income than those who are unemployed. If the unemployment rate falls it means that more people have disposable income to spend on consumer products and services. This creates an increase in demand that causes inflationary pressure on prices. At the same time companies expand their operations to meet the increase in demand but they now have a smaller pool of labour to choose from. This means that it costs more to hire and train the right staff, again causing inflationary pressure. The FOMC attempt to control inflation and keep it at a healthy rate so the US economy does not boom only to burn itself out and head into a crippling recession. To control inflation the fed uses interest rates. If inflationary pressure increases beyond the Fed’s threshold then they will raise interest rates thus making the dollar more attractive. At the time of writing the FOMC isn’t expected to raise interest rates further until mid 2007. However with encouraging employment data and the basic economic understanding that it will cause inflation you can see why there was such a strong demand for dollars post Non-Farm Payrolls.

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