What impact does the U.S. employment report have on the exchange rate?
After the U.S. employment statistics are released, the forex market tends to move sharply, a fact that is well known among investors.FXinvestors, particularlyUSD/JPYtraders cannot miss this event. Therefore, in this article, we will explain what the U.S. employment statistics are and why they influence the foreign exchange market. If you know that U.S. employment statistics are important but don’t understand why they have such a big impact, please read this article.
■ What are U.S. employment statistics
U.S. employment statistics refer to economic data released by the U.S. government, typically published by the U.S. Bureau of Labor Statistics, Employment Situation. The U.S. employment statistics are released every month on a fixed schedule. The release date is the first Friday of each month, and the release time is 8:30 a.m. New York time. In Japan, when the U.S. is on standard time (EST, Eastern Standard Time), it is 22:30; when on daylight saving time (EDT, Eastern Daylight Time, the second Sunday of March at 14:00) through the first Sunday of November at 14:00, it is 21:30. 2230(EST分です。日本時間では、米国が冬時間、東部標準時)の場合22時30分に、米国が夏時間(EDT、東部夏時間、3月第2日曜日14時から11月第一日曜日14時まで適用される)場合21時30分に当たります。
雇用情勢として発表されるデータは、人口（雇用者数、失業者数、非労働人口数、労働参加率）、失業率(年齢別、人種別、男女別、学歴別)、失業理由、失業期間、パートタイム労働者数(理由別)、非労働人口の内訳、非農業部門就業数、女性労働力率・生産及び非管理職雇用者比率、労働時間・賃金(平均週労働時間、平均時給、平均週給)、景気動向指数の10種です。
■ What are the notable points of U.S. employment statistics
10Among the ten types of employment data, the two data points that attract the most attention as “U.S. employment statistics” are “Nonfarm Payrolls” and the “Unemployment Rate.”
Nonfarm payrolls show the breakdown of employed persons in the nonfarm sector (excluding the labor force participants and self-employed). The payroll numbers are released for private and public sectors; the private sector is broken down by industry with its gains and losses. Of particular interest is the manufacturing payroll, because its changes reflect manufacturing production conditions and are regarded as indicating the direction of investment in other sectors (such as services) and the overall U.S. economic trajectory.
The unemployment rate is calculated as the number of unemployed people divided by the labor force, multiplied by 100. Unemployed people satisfy three conditions: (1) not having a job, (2) being currently available for work, and (3) actively seeking work. Unlike Japan, where the unemployed are defined as those who have sought work within the past week, the U.S. definition extends to the last four weeks, which tends to yield higher unemployment figures in the United States compared to Japan.
■ Trends in U.S. employment statistics
So, how have U.S. employment statistics trended over the long term? Below we provide an overview of nonfarm payrolls and unemployment rates since 2001.
Since 2001, the U.S. economy has experienced two recessions. The first was triggered by the IT bubble bursting in 2001, and the second by the housing bubble collapse in 2008. The latter, following the collapse of Lehman Brothers, a major U.S. investment bank deeply involved in the housing bubble, escalated into a global financial crisis commonly known as the “Lehman Shock.”
U.S. employment statistics vividly reflect these economic waves. Nonfarm payrolls (manufacturing) fell from over 17 million before the IT bubble to around 14 million after, and during the housing bubble they stopped declining but then dropped to the 11 million range after the bubble burst. By contrast, the unemployment rate rose from the 4% range before the IT bubble to 6.3% (June 2003) after the bubble burst, and from the mid-4% range at housing bubble peak to around 10% (October 2008) after the crash.
(Source) U.S. Department of Labor Bureau of Labor Statistics, Labor Force Statistics from the Current Population Survey, Table A-1, https://www.bls.gov/cps/cpsatabs.htm
〔Figure〕U.S. unemployment rate (unit: %)
(Source) U.S. Department of Labor Bureau of Labor Statistics, Current Employment Statistics - CES (National), Employees on nonfarm payrolls by industry sector and selected industry detail, https://www.bls.gov/cps/cpsatabs.htm■ Influence of U.S. employment statistics on the forex market
Why do U.S. employment statistics attract attention from investors? Because they have a large impact on the market.
The central bank that conducts monetary policy in the United States is the Federal Reserve Board (FRB). Similar to the Bank of Japan, it functions as a “issuing bank” and a “government bank,” and also as the “bank of banks” that can significantly influence markets, the economy, and prices.FRB interacts with private banks to adjust market liquidity and guide interest rates.
Central banks conduct monetary policy to stabilize prices and the economy. While many indicators exist that signal future price trends, employment statistics are considered especially important because the FRB places employment stability as a primary objective.
When employment stability is threatened or unemployment seems likely to rise, the FRB will responsibly ease policy to stimulate the economy. Conversely, if the economy is overheating and the labor market is tight with wages rising, the FRB will tighten policy to slow the economy.
Wage growth is welcomed by the public, and some argue that there is no need to suppress the economy. However, if rising wages push up prices, consumer spending (particularly among those who cannot benefit from wage gains, such as pensioners) may be restrained, potentially leading to a recession. Therefore, if the economy appears to be overheating, the FRB tightens policy to moderate growth and prices.
■ If U.S. employment statistics indicate an overheating economy
If the unemployment rate improves more than expected or employment increases more than forecast, the FRB sees this as a sign of overheating. As noted above, when signs of overheating appear, tightening monetary policy is forecasted.
If the FRB conducts monetary policy in a quantitative way, the amount of liquidity supplied to the financial markets will be tightened, leading to tighter market liquidity.
So what impact does overheating have on the foreign exchange market? As the economy heats up, the FRB raises market interest rates. If other countries’ market rates stay the same while U.S. rates rise, the interest rate differential between the United States and others widens. Investment funds moving across borders will sell other currencies and buy dollars when flowing into the U.S., creating upward pressure on the dollar and downward pressure on other currencies.
■ If U.S. employment statistics indicate a deceleration in the economy
Conversely, if the unemployment rate worsens more than expected, or employment grows less than forecast, or falls more than forecast, the FRB sees this as a sign of deceleration. As mentioned above, if U.S. employment statistics indicate deceleration, markets are expected to foresee monetary easing.
FRBIf it conducts monetary policy quantitatively, the amount of liquidity supplied to the financial markets increases, leading to looser market liquidity.FRBIf it prioritizes interest rates, a fall in market rates is expected. A decline in market rates will spread to the whole spectrum of interest rates, affecting household and corporate economic activity in the United States.
■ Pre-release expectations and deviations from expectations for U.S. employment statistics
Financial institutions and finance professionals forecast the results of upcoming economic indicators and corporate performance due to their operational needs or to provide information to clients. Experts form their own predictions based on their information, analytical abilities, and the direction of analysis, leading to a range of forecasts. Among these forecasts, the central value located right at the middle is called “market expectations” or “market consensus.”
Many investors act based on the market expectations announced in advance. For example, if markets expect that U.S. employment statistics will show deceleration, market participants will preemptively reduce dollar long positions. This behavior is described as “the market has priced in” the expectation.
If U.S. employment statistics do not deviate much from market expectations, exchange rate movements will be minor. This is because market participants have already acted in anticipation (the market is priced in) and there is no need for additional trades. On the other hand, if U.S. employment statistics diverge significantly from market expectations, exchange rates will move substantially, since higher or lower than expected interest rate changes and related currency movements are anticipated.
■ Increasing predictabilityFRB
Market participants are not directly involved in monetary policy decisions. They are only predicting U.S. employment statistics outside the FRB (speculation).FRB regards pre-forecasts as contributing to smooth price and interest rate changes in the market, but also has concerns. When pre-forecasts and actual results diverge widely, market participants who see a “surprise” may panic, causing market disruption.
ThereforeFRB has, in recent years, begun releasing its own forecasts at meetings where monetary policy is decided (FOMC). What is released includes real GDP growth, unemployment rate, PCE (Personal Consumption Expenditures) price changes, and the PCE core (ex-food and energy) price changes. The 4 indicators are those for which the median and mode of the FOMC members’ predictions are disclosed.
Of course, the economic outlook provided by the FOMC is not perfect. No matter how much time and effort the FOMC puts into its outlook, it cannot completely eliminate the divergence between actual U.S. employment statistics and market expectations. Nevertheless, merely reducing uncertainty about the FRB’s stance and outlook helps to dampen market price and interest rate volatility. Market participants can now form expectations like “rate hikes will end this year” or “rate cuts may come,” by watching the economic outlook published at each FOMC meeting.
■ Should you worry about U.S. employment statistics, or are they unpredictableNo matter how advanced technology becomes or how much information is input, it is impossible to predict U.S. employment statistics with perfect accuracy. Of course, it is possible to collect employment-related data other than U.S. employment statistics, such as Challenger layoffs, ADP Employment Statistics, initial and continuing unemployment claims, etc., to forecast future trends.
However, since perfect accuracy cannot be achieved, discrepancies between forecasts and actual results are unavoidable. The larger the discrepancy, the greater the potential market movement… Even with AI and machine learning, such surprises are unavoidable.
■ Preparing for U.S. employment statistics surprises
U.S. employment statistics not only indicate employment conditions but also suggest the overall movement of the economy. They influence monetary policy and the global interest rate differentials. In some cases they can trigger large movements of investment money and even alter the trends of international capital flows. Given their potential impact, U.S. employment statistics will continue to attract attention, even now that economic outlooks are released by FOMC.FOMCeconomic outlooks remain important.
Market participants should be aware that when market expectations deviate significantly, exchange rates can move violently. Depending on leverage and margin, such moves can force closures of positions. I have also held a dollar-buying position in FX. Once, I stayed up until 22:30 for the employment release, but fell asleep and woke up to an email saying the position had been forcibly closed due to insufficient margin. That experience made me regret not preparing better for the U.S. employment statistics release.
FX positions require watching the U.S. employment statistics release no matter what. On the first Friday of every month, at 22:30 (21:30 in daylight saving time), be ready to check the results immediately. If market expectations and the actual results are in line, you may sleep as usual, but if there is a deviation, adjust your positions or currency holdings right away to protect your assets.
■ Summary
We explained how U.S. employment statistics influence the forex market and what to watch for in terms of outcomes. Do not fear merely because you don’t understand the mechanism; understanding it will change how you respond. While keeping an eye on foreseen forecasts, basing your own forecast on indicators released ahead of the U.S. employment statistics can deepen your understanding. Prepare reasonably and wait for the next U.S. employment statistics release.
(Source) U.S. Department of Labor Bureau of Labor Statistics, Labor Force Statistics from the Current Population Survey, Table A-1, https://www.bls.gov/cps/cpsatabs.htm
〔Figure〕U.S. unemployment rate (unit: %)(Source) U.S. Department of Labor Bureau of Labor Statistics, Current Employment Statistics - CES (National), Employees on nonfarm payrolls by industry sector and selected industry detail, https://www.bls.gov/cps/cpsatabs.htm■ Influence of U.S. employment statistics on the forex market
Why do U.S. employment statistics attract attention from investors? Because they have a large impact on the market.
The central bank that conducts monetary policy in the United States is the Federal Reserve Board (FRB). Similar to the Bank of Japan, it functions as a “issuing bank” and a “government bank,” and also as the “bank of banks” that can significantly influence markets, the economy, and prices.FRB interacts with private banks to adjust market liquidity and guide interest rates.
Central banks conduct monetary policy to stabilize prices and the economy. While many indicators exist that signal future price trends, employment statistics are considered especially important because the FRB places employment stability as a primary objective.
When employment stability is threatened or unemployment seems likely to rise, the FRB will responsibly ease policy to stimulate the economy. Conversely, if the economy is overheating and the labor market is tight with wages rising, the FRB will tighten policy to slow the economy.
Wage growth is welcomed by the public, and some argue that there is no need to suppress the economy. However, if rising wages push up prices, consumer spending (particularly among those who cannot benefit from wage gains, such as pensioners) may be restrained, potentially leading to a recession. Therefore, if the economy appears to be overheating, the FRB tightens policy to moderate growth and prices.
■ If U.S. employment statistics indicate an overheating economy
If the unemployment rate improves more than expected or employment increases more than forecast, the FRB sees this as a sign of overheating. As noted above, when signs of overheating appear, tightening monetary policy is forecasted.
If the FRB conducts monetary policy in a quantitative way, the amount of liquidity supplied to the financial markets will be tightened, leading to tighter market liquidity.
So what impact does overheating have on the foreign exchange market? As the economy heats up, the FRB raises market interest rates. If other countries’ market rates stay the same while U.S. rates rise, the interest rate differential between the United States and others widens. Investment funds moving across borders will sell other currencies and buy dollars when flowing into the U.S., creating upward pressure on the dollar and downward pressure on other currencies.
■ If U.S. employment statistics indicate a deceleration in the economy
Conversely, if the unemployment rate worsens more than expected, or employment grows less than forecast, or falls more than forecast, the FRB sees this as a sign of deceleration. As mentioned above, if U.S. employment statistics indicate deceleration, markets are expected to foresee monetary easing.
FRBIf it conducts monetary policy quantitatively, the amount of liquidity supplied to the financial markets increases, leading to looser market liquidity.FRBIf it prioritizes interest rates, a fall in market rates is expected. A decline in market rates will spread to the whole spectrum of interest rates, affecting household and corporate economic activity in the United States.
■ Pre-release expectations and deviations from expectations for U.S. employment statistics
Financial institutions and finance professionals forecast the results of upcoming economic indicators and corporate performance due to their operational needs or to provide information to clients. Experts form their own predictions based on their information, analytical abilities, and the direction of analysis, leading to a range of forecasts. Among these forecasts, the central value located right at the middle is called “market expectations” or “market consensus.”
Many investors act based on the market expectations announced in advance. For example, if markets expect that U.S. employment statistics will show deceleration, market participants will preemptively reduce dollar long positions. This behavior is described as “the market has priced in” the expectation.
If U.S. employment statistics do not deviate much from market expectations, exchange rate movements will be minor. This is because market participants have already acted in anticipation (the market is priced in) and there is no need for additional trades. On the other hand, if U.S. employment statistics diverge significantly from market expectations, exchange rates will move substantially, since higher or lower than expected interest rate changes and related currency movements are anticipated.
■ Increasing predictabilityFRB
Market participants are not directly involved in monetary policy decisions. They are only predicting U.S. employment statistics outside the FRB (speculation).FRB regards pre-forecasts as contributing to smooth price and interest rate changes in the market, but also has concerns. When pre-forecasts and actual results diverge widely, market participants who see a “surprise” may panic, causing market disruption.
ThereforeFRB has, in recent years, begun releasing its own forecasts at meetings where monetary policy is decided (FOMC). What is released includes real GDP growth, unemployment rate, PCE (Personal Consumption Expenditures) price changes, and the PCE core (ex-food and energy) price changes. The 4 indicators are those for which the median and mode of the FOMC members’ predictions are disclosed.
Of course, the economic outlook provided by the FOMC is not perfect. No matter how much time and effort the FOMC puts into its outlook, it cannot completely eliminate the divergence between actual U.S. employment statistics and market expectations. Nevertheless, merely reducing uncertainty about the FRB’s stance and outlook helps to dampen market price and interest rate volatility. Market participants can now form expectations like “rate hikes will end this year” or “rate cuts may come,” by watching the economic outlook published at each FOMC meeting.
■ Should you worry about U.S. employment statistics, or are they unpredictableNo matter how advanced technology becomes or how much information is input, it is impossible to predict U.S. employment statistics with perfect accuracy. Of course, it is possible to collect employment-related data other than U.S. employment statistics, such as Challenger layoffs, ADP Employment Statistics, initial and continuing unemployment claims, etc., to forecast future trends.
However, since perfect accuracy cannot be achieved, discrepancies between forecasts and actual results are unavoidable. The larger the discrepancy, the greater the potential market movement… Even with AI and machine learning, such surprises are unavoidable.
■ Preparing for U.S. employment statistics surprises
U.S. employment statistics not only indicate employment conditions but also suggest the overall movement of the economy. They influence monetary policy and the global interest rate differentials. In some cases they can trigger large movements of investment money and even alter the trends of international capital flows. Given their potential impact, U.S. employment statistics will continue to attract attention, even now that economic outlooks are released by FOMC.FOMCeconomic outlooks remain important.
Market participants should be aware that when market expectations deviate significantly, exchange rates can move violently. Depending on leverage and margin, such moves can force closures of positions. I have also held a dollar-buying position in FX. Once, I stayed up until 22:30 for the employment release, but fell asleep and woke up to an email saying the position had been forcibly closed due to insufficient margin. That experience made me regret not preparing better for the U.S. employment statistics release.
FX positions require watching the U.S. employment statistics release no matter what. On the first Friday of every month, at 22:30 (21:30 in daylight saving time), be ready to check the results immediately. If market expectations and the actual results are in line, you may sleep as usual, but if there is a deviation, adjust your positions or currency holdings right away to protect your assets.
■ Summary
We explained how U.S. employment statistics influence the forex market and what to watch for in terms of outcomes. Do not fear merely because you don’t understand the mechanism; understanding it will change how you respond. While keeping an eye on foreseen forecasts, basing your own forecast on indicators released ahead of the U.S. employment statistics can deepen your understanding. Prepare reasonably and wait for the next U.S. employment statistics release.
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