HOW NONFARM PAYROLLS (NFP) IMPACTS THE US DOLLAR & USD PRICE VOLATILITY
- The US Dollar typically exhibits heightened volatility around the monthly release of nonfarm payrolls data and places USD price action at risk of experiencing outsized moves
- Realized volatility in the US Dollar Index and its major currency pairs around NFP reports tends to run above-average as forex traders reassess the US economy and jobs market
- Read more on Trading the NFP Report or check out this insight on the Federal Reserve for details on how nonfarm payrolls data can impact FOMC interest rate decisions
Currency volatility, which is characterized by the frequency and magnitude of changes in a currency’s value, tends to rise during times of heightened market uncertainty. The periodical release of US jobs data – like nonfarm payrolls – in addition to several other high-impact economic reports have historically served as primary catalysts for heightened market activity.
Referred to less formally as NFP or NFPs, monthly nonfarm payrolls data is published on the first Friday of each month at 8:30 AM EST by the Bureau of Labor Statistics (BLS). This closely watched jobs report provides market participants with a detailed summary of the employment situation and broader labor market conditions across the United States.
US DOLLAR VOLATILITY TYPICALLY ELEVATED IN RESPONSE TO THE MONTHLY NFP REPORT (CHART 1)
In consideration of the Federal Reserve (Fed) and its stated dual-mandate of price stability and full employment, it may come as little surprise that the monthly NFP report frequently sparks a violent reaction across several assets including the US Dollar, gold, equities and many others.
This is seeing that heavy-hitting jobs data has serious potential to sway market expectations regarding future changes in Fed monetary policy and influence on benchmark interest rates set by the FOMC.
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That said, realized volatility in the DXY US Dollar Index in the wake of NFP data releases is frequently higher when compared to normal market conditions (i.e. median 20-day ATR) and trading activity observed over the preceding month (i.e. actual 20-day ATR), which is illustrated in chart 1 above.
NONFARM PAYROLLS DATA TENDS TO SPARK VOLATILITY IN THE US DOLLAR AND MAJOR USD CURRENCY PAIRS (CHART 2)
This concept of hyperactivity in the US Dollar around nonfarm payrolls is also observed across major USD currency pairs. In fact, the daily trading range recorded by the DXY Index on NFP day exceeds its 5-day average true range 73% of the time.
Similarly, EUR/USD price action tops its respective 5-day ATR in response to nonfarm payrolls 64% of the time while USD/JPY exceeds it 68% of the time. On another note, volatility observed in the US Dollar roughly mirrors the NFP surprise magnitude.
US DOLLAR VOLATILITY GENERALLY DEPENDS ON SIZE OF NFP SURPRISE (CHART 3)
This means the greater the difference between actual results and forecast estimates (in absolute value terms), the more likely the DXY Index and its components will experience elevated measures of volatility.
Intraday swings in USD price action grows increasingly volatile – particularly with respect to its 5-day ATR – as the size of NFP surprises expands.US Dollar volatility is less prominent when the headline change in nonfarm payrolls falls roughly in-line with the market estimates (i.e. low NFP surprise).
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For example, if the median economist consensus is expecting the headline change in nonfarm payrolls to cross the wires at +150K but the actual reading come in at -20K jobs (i.e. NFP surprise = |170K|), there is a 73.3% probability that the DXY Index range will exceed its relative 5-day ATR.
If markets are expecting a print of +100K but +120K is actually reported (i.e. NFP surprise = |30K|), there is a 49.5% probability that the DXY Index range will be less than its respective 5-day ATR.
NFP HISTORICAL DATA SURPRISE DISTRIBUTION FREQUENCY (CHART 4)
Nevertheless, the frequency of occurrence falls as the absolute value NFP surprise widens according to historical data since June 1998. In other words, there is a 41.2% statistical probability that the headline change in nonfarm payrolls is reported within a +/- 37.5K surprise band relative to market expectations.
Likewise, there is a 5.9% statistical probability that actual NFP data will be reported within a +/- 75.0K to 112.5K surprise band. Furthermore, there is a rough positive relationship between the directional surprise in NFP data and the US Dollar.
US DOLLAR PERFORMANCE IN RESPONSE TO NONFARM PAYROLLS DATA (CHART 5)
While it might not always be the case, a better-than-expected reading on nonfarm payrolls is generally associated with higher spot USD prices (and vise-versa). At the same time, the magnitude of performance in the Greenback roughly mirrors the degree of the NFP surprise.
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For instance, the DXY Index notched a -1.61% decline on June 03, 2016 after the -122K surprise miss revealed in the period’s NFP report, but the US Dollar recorded a more palatable -1.11% drop when nonfarm payrolls data reported on May 03, 2002 missed estimates by a less disappointing -15K jobs.
On the other hand, the May 06, 2011 NFP report beat expectations by +59K jobs and saw the US Dollar rise by 0.87% in response while the May 07, 2004 release surprised by +118K and drove the DXY Index 1.38% higher.
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