CPI, NFP and risk-on, risk-off

Between central bank meetings, two kinds of things move currencies: data that changes what the central banks are expected to do, and swings in global appetite for risk that move whole groups of currencies at once regardless of their own data.

Data as an input to rate expectations

A data release matters to the extent it changes the expected path of interest rates. That is the whole model. Inflation and employment are the two things central banks are mandated to care about, so their data is the most important:

The "usually" is important. Late in a hiking cycle, a strong inflation print can push a currency down if the market decides the bank will over-tighten and cause a recession. Early in a cutting cycle, weak data can be shrugged off because cuts are already priced. The reaction depends on where the cycle is, which is why the previous lesson's habit of knowing what is priced matters.

The three numbers in every release

Every calendar entry has a previous value, a consensus (the median forecast of surveyed economists), and, at release time, the actual. The surprise is actual minus consensus. That is what price reacts to.

Example, illustrative. US CPI year-on-year: previous 3.4%, consensus 3.2%, actual 3.6%. The surprise is +0.4 percentage points, to the hot side. Traders infer the Fed is less likely to cut soon; the dollar rises, and EUR/USD might drop 50 to 80 pips in the first minute.

Now the same release with actual 3.2%: no surprise; the reaction is small and can go either way as positions square.

The first move is not always the lasting one. Releases like the NFP report contain several numbers (jobs, unemployment, wages, revisions to prior months) and the market often reacts to the headline, then re-reads the details and reverses. A common pattern is a violent move in the first thirty seconds, a partial retrace over five minutes, and the "real" direction emerging over the next hour.

NFP specifically

US Non-Farm Payrolls, published by the Bureau of Labor Statistics on the first Friday of the month at 08:30 ET, is the most-traded data release in the world. What makes it dangerous:

• The consensus is often wrong by a large margin (the standard error of the estimate is around 100,000 jobs).
• Revisions to the previous two months arrive in the same release and can dwarf the headline surprise.
• Spreads on the majors go from under one pip to five or ten for a minute or two.
• The move is often 50 to 100 pips in EUR/USD within the first minute, and the direction sometimes flips.

For a beginner, NFP is a day to watch, not a minute to trade. Be flat at 08:30 ET on the first Friday, or hold a position sized for a 100-pip adverse move with a stop you accept may slip.

Risk-on and risk-off

The second driver has nothing to do with any single country's data. When investors worldwide become more willing to take risk (risk-on), money flows out of safe assets into higher-yielding and growth-linked ones. When fear rises (risk-off), it flows back. Currencies sort into two camps:

So in a sharp risk-off move (an equity sell-off, a geopolitical shock, a credit scare) the typical pattern is: AUD/JPY falls hard, USD/JPY falls, AUD/USD and NZD/USD fall, USD/CHF falls, and EUR/USD is often muddled because both sides are mid-table. AUD/JPY is the pair traders watch as a barometer because its two currencies sit at opposite ends.

The yen's safe-haven status is a legacy of decades of near-zero Japanese rates: investors borrowed yen to buy higher-yielding assets, and when they de-risk, they sell those assets and buy the yen back. When Japanese rates rise, the effect weakens, so treat the table as a tendency that shifts over years.

Key idea: Data moves a currency by changing its expected rate path; risk sentiment moves groups of currencies at once regardless of data. When your pair moves and the calendar was empty, look at equity indices and AUD/JPY before looking for a reason in the pair itself.

Commodity currencies

AUD, NZD, CAD and NOK are commodity currencies: their economies export raw materials, and their currencies track the prices of those materials. The links are stable enough to be useful and loose enough to be dangerous:

A sharp oil rally tends to push USD/CAD down (CAD stronger). Weak Chinese data tends to push AUD/USD down. These are a second source of moves that will not show up on the pair's own calendar.

Try it: Take the last three US CPI releases. For each, write down consensus, actual, and the surprise in percentage points. On a five-minute chart of EUR/USD, measure the move in the first five minutes after 08:30 ET and the move over the following hour. Note whether the direction of the one-hour move matched the direction the surprise implied.

Recap

• Data moves currencies by changing expected rate paths; inflation (CPI) and employment (NFP) matter most.
• The reaction is to actual minus consensus, and it depends on where the cycle is; the first move often partially reverses.
• NFP (first Friday, 08:30 ET) is the most volatile scheduled release; beginners should be flat or sized for a 100-pip shock.
• Risk-off strengthens JPY, CHF and USD and weakens AUD, NZD and CAD; AUD/JPY is the barometer.
• Commodity currencies (CAD with oil, AUD and NZD with China and metals or dairy) move with their exports.