Importance of Non-Farm Payroll Reports to Futures Traders

Every trader knows the impact of economic numbers on the market. Economists gather and announce their estimates on what the numbers should be to the press. If the estimates are in line with the actual figures, the market is said to have priced in the numbers often barely reacting.

However, if the estimates and the actual figures don’t match up, extreme market moves can take place wherein the market attempts to make up for being fundamentally mispriced via an extreme move to reset itself in line with the actual figures.

No traders are more familiar with the consistent market shaking power of economic numbers than Forex traders. There is an economic release that occurs monthly that often causes severe reactions in the currency markets this is the Non-Farm Payroll Report or NFP. At 8:30 a.m. EST on the 3rd Friday of every month the figure is released.

The NFP is a measure of job creation. A rise in NFP may indicate rapid growth and inflationary pressures which the Fed may attempt to slow by increasing interest rates. A drop in NFP is thought to point toward a slowing economy which may trigger an interest rate decrease by the Fed. Here is a chart showing the severe effect the NFP can have on the currency market. Note the drop right at 8:30 a.m. and volume surge in the Euro Futures when the number didn’t meet estimates:

Most traders like to imagine being on the right side of such a dramatic market move, unfortunately, many traders get caught on the wrong side and pay the consequences. How about a way to hedge your exposure to such moves, yet remain in the position for potential profit?

Here is something that potentially fits the bill: Although the NFP report is well known by currency traders, what isn’t as well known is that the CME has recently launched a new future group known as “Economic Event Futures”. The NFP report Future is the first product in this group to be released.

This future contract allows the trader to speculate directly on the number itself without having to use a proxy such as the currencies to profit from a correct interpretation of the release. They can also be used to hedge other positions, particularly those in the currency market, against a severe adverse move caused by the actual NFP figure.

Here are the details on this unique new product. It’s traded electronically on GLOBEX and is sized at $25.00 X the change in NFP from the previous release. The minimum price fluctuation is 1000 jobs or $25.00 per tick. Contracts are monthly and available for all months expiring on the 3rd Friday of each month at 8:30 a.m. when the figure is released. The new contract is available the Monday after the release date and the ticker is NFP.

This is an excellent tool for traders and investors to use for speculation and/or hedging of positions that are directly affected by the NFP release. It will be interesting to see what other products the CME releases in the Economic Release category in the future.

David Goodboy is Vice President of Marketing for a New York City based multi-strategy fund.