A Close Look at the U.S. Non-Farm Payrolls

May 09, 2011 9:28 AM ET

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Forex Gump is my incognito name. My real name is Feras Gimp. When I was a kid, my parents would make me hunt and gather food. So every day, I would go fish at a nearby lake and gather corn from the fields. This process took me all day and left no time for me to play. Play time actually didn’t matter because I had no friends to play with anyway because they were all to busy hunting and gathering food as well. One day, while resting under an apple tree, an apple fell and hit me on the head. I came up with an idea where if I focused on just fishing and I could find somebody to focus on just gathering corn, maybe we could finish working faster and have enough time left to play. So I tried it and it worked. I wanted to fully understand why this worked and that’s where I discovered his love for economics. I later became a senior macroeconomics professor at Pipvard University in Pipston, Pipsachussetts. After several decades there, one day I decided to stop teaching. Leaving campus that afternoon, as I reversed out of the parking lot, I reversed into a pristine Bentley. It was Dr. Pipslow’s car. (Now a fellow blogger on BabyPips.com) He had been invited by the school to demonstrate his ability to float currencies. When we met each other, Dr. Pipslow already knew who I was. He told me not to worry about his whip and explained to me that BabyPips.com needed a macroeconomics expert and wondered if I was interested. I was. So the following day, I changed me name to Forex Gump and created Piponomics.

On Friday, March's non-farm payrolls came out. The good news is that it clocked in a 244,000 net increase in the number of jobs, which was significantly bigger than the 185,000 figure the market initially expected. It was also better than the 211,000 gain seen the previous month.

Unfortunately, the jobless rate did not share the same optimistic tune. According to the employment report, joblessness in the U.S. disappointingly climbed to 9.0% from 8.8% as job creation could not keep up with the number of people entering the workforce.

Average hourly wages also an upset as it only showed a 0.1% growth, and not 0.2% as expected. It looks as if the employment conga line is getting longer and longer!

Other reports related to the U.S. labor market didn't look too well either. The ADP's version showed only a rise of 179,000, a slower pace of growth than in March. For the week ending April 23, unemployment claims also jumped to 474,000 from the previous week's 431,000.

Effect on EUR/USD

Now let's take a look at how the NFP report affected price action in the forex market. But to make things a little more exciting this time, we'll put it side by side with the past NFP reactions and see if we can spot some differences. This should be interesting...

	February	March	April
Forecast	191,000	191,000	185,000
Actual Results	192,000	216,000	244,000
Effect on EUR/USD	50-pip rise	200-pip rally	250-pip drop

As you probably noticed from the table above, the NFP results for the past three months came in better than expected.

For the February and March results, EUR/USD reacted positively to the upbeat U.S. labor market figures yet the price action following the April report was the exact opposite. In fact, the NFP figure for April printed the biggest upside surprise yet EUR/USD suffered its worst drop.

What's different this time around?

After rummaging through my past Piponomics articles, I remembered that the market's mood was very much different during the release of the February and March NFP figures.

At that time, traders were counting on an interest rate hike from the European Central Bank (ECB), which was probably why upbeat economic data just whet their appetite for higher-yielding currencies.

This time around, the euro seems to have lost its appeal. For one thing, news that Greece may leave the euro zone made the U.S. dollar look more stable than the euro.

Aside from that, euro bulls had to take their much needed break after the overextended euro rallies. Euro traders were probably waiting to close their long positions and the NFP release became a catalyst for profit-taking.

Looking forward, it seems that the U.S. labor market could continue to see more improvements but, as always, it's tough to tell how the currencies will react.

If you haven't dozed off in the past couple of paragraphs, you'd realize that market sentiment plays a crucial role in determining price action during the NFP release. That's why I always remind you to read Pip Diddy's daily economic roundup, drink your milk, and eat your vegetables!

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