Multidirectional Labor Market Dynamics of the US and Canada

As is known, data on changes in employment and unemployment in the US and Canada are simultaneously published every first Friday of the month.

Special attention, of course, is paid to Nonfarm Payrolls as the most popular indicator, causing high volatility of currency pairs with the US dollar.

If the Nonfarm Payrolls indicator is volatile in itself, then what would be the signal strength of a simultaneous multidirectional change in Nonfarm Payrolls and Employment Change in Canada for the USDCAD currency pair?

According to visual observations, it is strong, fast and rare.

In addition to the signal of employment indicators, the signal of multidirectional changes in the unemployment rates of these countries is also of interest.

Let's test them on 14-years history.

Strategy

When the updated US and Canadian employment or unemployment indicators are multidirectional:

• Timeframe M15: enter the market at the time of publication of this data;
• Timeframe D1: enter the market at the open of the next day.

Conditions for buying:

1. For employment indicators:

NFP (1) > NFP (0) и

ЕC (1) < ЕC (0)

2. For unemployment indicators:

UNu (1) < UNu (0) и

UNc (1) > UNc (0)

Conditions for selling:

1. For employment indicators:

NFP (1) < NFP (0) и

ЕC (1) > ЕC (0)

2. For unemployment indicators:

UNu (1) > UNu (0) и

UNc (1) < UNc (0)

where: 0 – previous/forecast value of the indicator

1 - current value of the indicator

Exit from the market

• at the close of 1, 2, 3, 4, 8, 12, 16, 20, 24, 28, 32 candlesticks after entry (after 15, 30, 45 minutes, 1, 2, 3, 4, 5, 6, 7, 8 hours);
• at the close of 1, 2, 3, 4, 5, 10 candlesticks (after 1, 2, 3, 4, 5, 10 days).

We will evaluate the trading strategy according to the following criteria:

• The average return reflects the relative change in quotations of financial instruments in percentage. A positive value of the average return indicates the profitability of the strategy, a negative one indicates a loss.

The average return (R) of a financial instrument is given by the formula:

where:

n - the number of transactions;

P (%) – the percentage of change in the quotation of the financial instrument at the time of fixing the position, is calculated as follows:

for buy positions

P (%) = (position closing price - position opening price) / position opening price * 100%

for sell positions

P (%) = (position opening price - position closing price) / position opening price * 100%

Analysis of the obtained results 

Let's take the notation:

• Employment - simultaneous multidirectional events: Nonfarm Payrolls (NFP) and Employment change in Canada (EC);
• Unemployment - simultaneous multidirectional events: US Unemployment Rate (UNu) and Unemployment rate in Canada (UNc);
• F-F - a signal based on the previous value (option to compare the current actual values ​​of employment/unemployment indicators with the previous ones);
• F-P - a signal based on the forecast value (option to compare the current actual values ​​of employment/unemployment indicators with the forecast ones).

The results are presented in diagrams:

The number of market entries is approximately the same for both signal options: based on the previous and forecast value.

The signal is very rare. It occurs on average quarterly for employment indicators and semi-annually for unemployment indicators.

The rate of return of the employment indicator signal is maximum and exceeds the minimum significant value of 0.1% when closing positions 15 minutes after entry. Then it gradually decreases towards the end of the trading day.

On the contrary, the rate of return of unemployment indicators signal is insignificant at first, then increases towards the end of the trading day. A significant value of 0.1% is reached after an hour for signals based on the forecast value, and after 3 hours for signals based on the previous value.

The rate of return of the signal based on the forecast value is higher than the rate of return of the signal based on the previous value. This confirms the conclusions of the study “Does the trading signal based on the predicted value work?”

Let's look at the signals in the medium term:

The rate of return of the employment indicators signal based on the previous value decreases with the increase in the term of holding the position and approaches a significant negative value of -0.3% at the end of the 3rd day of holding the position.

The rate of return of the unemployment indicators signal, based on the previous value, increases markedly with an increase in the holding period to a significant value of 0.3% when exiting the market in 2 weeks.

The rate of return of the employment indicators signal based on the forecast value also grows and approaches a significant value of 0.3% at the end of the 5th day of holding the position.

As for the rate of return of the unemployment indicators signal based on the forecast value, it ranges from -0.09% to 0.05%, without reaching a significant value of 0.3% modulo.

Detailed results are shown in the Appendix:

XLSX (0.10 MB)Multidirectional labor market dynamics in the US and Canada.xlsx