The foreign exchange market is influenced by a countless number of factors. Everything from central bank speeches to world-changing black swan events can have an impact on the world’s currencies. And nonfarm payrolls are no different.

In this article, we’re discussing what nonfarm payrolls are, who they include, when they are published and how they affect foreign exchange.

US nonfarm payrolls

The employment sector is one of the pillars of a nation’s economy. When people are working, the economy benefits in areas like consumer spending and government income from taxes. Due to its significant contribution to the economy, it’s crucial that countries monitor the number of people they have in work.

In the United States, the number of workers in the country is measured through nonfarm payrolls. Nonfarm payrolls are produced by the Bureau of Labor Statistics (BLS).

The BLS surveys private and government bodies to gain data about the number of people they employ. The results are then published to the public in a report called the Employment Situation Summary.

How do nonfarm payrolls affect FX?

As one of the major contributors to economic growth, employment plays a pivotal role in indicating the strength of a country’s economy.

The value of a currency on the foreign exchange (FX) market is hugely influenced by signs of a nation’s economy becoming stronger or weaker. As a result, the US’s nonfarm payroll report consistently causes some of the largest movements in the FX market.

Market movements from nonfarm payrolls are mainly caused by the relationship between forecasts from analysts and actual data from nonfarm reports.

When nonfarm payroll data is said to be better-than-expected, it means US employment statistics have outperformed the forecasts. Usually, this boosts the value of the dollar as it shows signs of strong economic growth. This entices traders into purchasing the US currency.

If nonfarm payroll data comes in lower-than-expected, the dollar may suffer as it shows worse employment figures in the US than anticipated. Traders may decide to sell dollars in favour of other currencies, causing the US’s currency to fall in value.

Example of nonfarm payrolls affecting foreign exchange

In September 2021, the nonfarm payroll report for August was published. Ahead of the announcement, analysts forecasted US employment would increase by 750,000. They were anticipating a weaker month than July – which saw a rise of 1.05 million – but missed the mark considerably.

The actual data from the BLS’s report showed nonfarm payrolls increase by only 235,000 in August. This put pressure on the dollar, leading to a drop in the US Dollar Index (DXY).

The DXY is used to measure the value of the American dollar. It does this by comparing the dollar to a basket of currencies containing its largest trading partners. This includes the euro, Swiss franc, Japanese yen, Canadian dollar, British pound, and Swedish krona.

After the release of the August nonfarm payrolls report, the dollar sunk by 0.25% to 91.98 on the DXY – the lowest it had been for over a month.

It weakened the dollar’s position against other currencies as the lower-than-expected data hinted at slow US economic growth. Traders may have used this as a reason to sell their dollars in favour of other currencies – thus decreasing the dollar’s value.

Why is it called nonfarm payroll?

Nonfarm payrolls account for all US workers except for farmers and workers in some other jobs. There are a few reasons why farmers are excluded.

Firstly, farming is a highly seasonal profession. This means peak agricultural employment varies wildly across the country. It depends on the region the farmers are working in and the commodity they are farming.

Additionally, it can be difficult to obtain accurate farming employment data due to self-employment, unpaid family employment and part-time or hobby farmers. It is also challenging to identify the number of unknown or undocumented workers that participate in farming.

Because of these complications, the BLS omits farmers from its national employment figures. Instead, farming employment statistics are tracked by the Department of Agriculture.

Which professions are not included in nonfarm payrolls?

As previously mentioned, farmers are not the only workers excluded from nonfarm payrolls. Some government workers, proprietors, private households, and not-for-profit employees also don’t make the cut.

Most government workers are included in nonfarm payrolls. However, people in the military and employees of government-appointed officials are not. Similarly, employees of the CIA, NSA, NIMA, and DIA are absent from nonfarm payrolls.

What is the nonfarm payroll report?

The nonfarm payroll report is featured in the BLS’s Employment Situation Summary. The Employment Situation Summary is constructed from two in-depth surveys: the household survey and the establishment survey. The surveys are combined to create one complete report.

Household survey

The household survey gathers data from a pool of 60,000 US households. It includes people from almost all types of employment, such as self-employed people, agricultural workers and home-based workers raising a family. It presents the unemployment rate and information about employment demographics.

Establishment survey

Using a larger sample size, the establishment survey interviews 145,000 businesses and government agencies accounting for 697,000 work sites. Unlike the household survey, it only features employees of companies that offer payroll counts. Because of this, the establishment survey is also known as the nonfarm payrolls report.

Furthermore, as well as showing the total number of nonfarm payroll employees, it also shows the number of new nonfarm payroll jobs added within the US’s economy.

What date does the nonfarm payroll report come out?

The report from the BLS is released on the first Friday of every month at 8:30 am EST (1:30 pm GMT). It offers insights into both month-on-month and year-on-year employment data.

The month-on-month statistics compare nonfarm payroll data from the most recent month to the previous month. Similarly, the year-on-year figures present annual comparisons.

Before the announcement, market analysts attempt to predict the outcome. These are known as forecasts and can influence markets depending on their accuracy.

Exchange currency with Privalgo

Nonfarm payrolls reports are an example of how volatile the currency markets can be. They are just one of many market influencers that can cause currency values to increase or decrease. But you shouldn’t let market volatility discourage you from exchanging currencies.

At Privalgo, currency exchange is what we do. Our Currency Specialists will get to know you and your FX requirements. They can offer guidance and financial solutions to mitigate the risk of market fluctuations affecting your money.

Book a free chat with a Privalgo Currency Specialist today and see how we can help.