Get ready for the currency market’s most important number

Tim Bennett explains what the US non-farm payrolls figure is, why it has currency traders on tenterhooks, and how can you trade it.

Tomorrow will be marked in red in every trader's diary. It's the first Friday of May. And as is the case on every first Friday in the month, a crucial piece of economic data will be released at 8.30am US-time (or 1.30pm UK-time). It's called the non-farm payrolls figure and it will have every currency investor on tenterhooks. So what is it and how can you trade it?

The US Bureau of Labor Statistics pumps out the stat. It is designed to capture the total number of paid workers in the US who work in any part of the economy except general government, private households, the non-profit sector and, of course, farming. Those may sounds like some quite big exclusions, but in fact the non-farm payroll data is thought to cover around 80% of the activities that contribute to US GDP.

And the reason it matters is that if the number surprises on the upside, it suggests businesses are hiring more workers than expected. In turn, that suggests higher levels of consumption and expenditure. So it's good news potentially for the US stock market, and for the US dollar in particular. Why?

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Because if the US economy is showing signs of life, the odds are that there will be less quantitative easing, and a higher chance of interest rates rising more quickly than the market has already priced in. Both of these are dollar supportive.

Meanwhile, if the world's biggest economy kicks out strong data, then that can have a ripple effect around the world, particularly to places such as the UK where a number of the top FTSE 100 firms are heavily US exposed.

How you position yourself of course, depends on your confidence in an upside or downside surprise tomorrow. As Zoe Fiddes at puts it: "Last month's NFP result disappointed, revealing a monthly change of 120,000 in employment. This was 85,000 short of the forecast figure and half of the previous month's result. This shook the market and instigated a USD downtrend with the greenback reaching the year's low against sterling at 1.6300 and the month's low against the euro at 1.3280.

"The result tomorrow is largely expected to show that 165,000 jobs have been added to the market, an increase on last month. If the data is strong enough to push back the QE expectations then the USD is likely to continue to strengthen, whilst if the data is weak it may put the USD under pressure again and we could see a reversal in the major currency pairs short-term trends."

One caveat if you are new to currency trading either exit the market before the data is released or get your stop losses in. Because one thing's for sure NFP data can usually be relied on to get the currency markets moving, and if they move against you, you want to be sure you are stopped out before your losses reach painful levels.

Tim graduated with a history degree from Cambridge University in 1989 and, after a year of travelling, joined the financial services firm Ernst and Young in 1990, qualifying as a chartered accountant in 1994.

He then moved into financial markets training, designing and running a variety of courses at graduate level and beyond for a range of organisations including the Securities and Investment Institute and UBS. He joined MoneyWeek in 2007.