04/04/2014: Watch out for the Non-farm Payrolls “spike”

In my experience of watching market reaction to a multitude of Non-farm Payroll announcements, traders must be prepared for the “spike” in prices as the market makes an immediate move in the minutes following the release.

Any price movement in the seconds prior to the release is just posturing as by law the data CANNOT be made public to anyone before the official release by the Bureau of Labor Statistics. The reporters in the “lock-up” room inside the Department of Labor are only allowed the release their communications, on government owned computers, once the data has been announced. This is to ensure extra security. Therefore do not be taken in by any pre-release moves.

Once the data is released at 13:30 British time (08:30 in the US) there will be a reaction, usually in the direction of the surprise. This month, Non-farm Payrolls is expected to be 200,000 so anything above that would be considered to be positive for the US economy and therefore US dollar positive; while any sizeable miss could have the opposite impact.

However, this does not mean that forex traders should necessarily jump in straight away. When it comes to Non-farm Payrolls, chasing the price can be a dangerous way to play it.  This is because of the spike that will often be seen.

In my experience the initial spike in the direction of the surprise will last for maybe 10 to 15 minutes before a retracement sets in. The size of the retracement is difficult to say exactly as it often depends on the size of the surprise. However, using a Fibonacci 50% retracement can be a decent place to start.

Trading in the direction of the surprise once the retracement has run its course will be how I will be looking to play Non-farm Payrolls as it is likely to give a better entry level than attempting to catch the initial move.

See the example of Cable below which shows the reaction to last months’s Non-farms. The strong number (175k versus expectation of 150k) saw the dollar strengthen, pulling GBP/USD lower. However the move only lasted for around 15 minutes before finding support around $1.6722 and retracing for about 15/20 minutes back towards $1.6747. Eventually the move continued in the direction of the surprise and Cable fell further.

NFP

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