The volatility of the 1st Friday of each month that Non-farm Payroll is released is not just down to the number of jobs created; this is a complex release that has four components that Traders must be aware of. The fact that it tends to follow the rate decisions from the ECB and BOE the previous day, and is always close to the well respected ISM economic surveys, does nothing to help tame the potential volatility. The fact that Asian markets are closed and European trade desks are into the last leg of their day, and it is the end of week alignment time, also adds to the scramble to find a stable dollar value.

The four NFP components are:

1. The Actual Number of jobs reported as being lost; June's released number is expected in at 520k, and is an average of analyst figures that range from -200k to -640k. The High to Low difference is from analysts is enormous, and that creates failed expectancy on Fair Value.  

2. The Revision to the previous month's number; probably as important as the new number because the revision can add up to 100k to the previous amount, either way, and that creates volatility as Traders re-align their previous thoughts on what happened four weeks ago.

3. The Employment Rate; currently at 8.9%, up from 4% in June 2007, that is expected in at 9.2%.

4. The Average Hourly Earnings; looking at coming in around 0.2%, this is the number that the Fed stated was causing it concern as an inflationary read. Wage increases stoke inflationary pressures and the FOMC members have said that they are as concerned with inflation as they are the housing market. 

If the NFP prints a slowdown in the job loss rate, the Revision stays close to last month's number of 539k, the Unemployment Rate stays below 9.3%, and the Hourly Earnings post at 0.2% as expected, traders will have confirmation that the economy is stabilizing a little. Their thought process will be that inflationary pressures are around due to the amount of dollars now in circulation, but no interest rate increases are likely from the Fed in the next 6-12 months.

That may strengthen the $ initially; the selling of the greenback has come from equity and oil markets going higher, ignoring the fear that the housing sector will continue to drag the manufacture, service industry, and therefore employment, lower. That however may be short lived dollar strength if equity markets pick up on the signs of stabilization and start to push stock values higher. The long-term view is still that on the days of equity strength the dollar will lose ground.

The secondary thought for Friday may come from the fact that the US economy is transitioning from a period of economic contraction and that expansion could be coming in 2010, much sooner than some thought possible. Compared to the business cycle of the major economies, UK, Switzerland, Euro Zone, Canada, Australia and Japan, that have all gone through the same rate cutting cycle, the -539k NFP read may not seem so bad. However, the dollar then has to be valued on its Growth (GDP)-to-Debt (Trade and Current Account) imbalance, and that is where long-term dollar values will start to get questioned.

The fly in the ointment is the US housing sector, it is weighing on most analysts minds as they look towards 2010, and some are predicting more quantative easing interest rate cuts (via the Treasury and bond market). The Fed will not want to be lowering overnight rates to zero appease the housing problem if there is continued signs of increases in inflation and in the 10 year Treasury note yield that really is creating a problem in trying to be contained. It is a fine balancing act, but one that will be made a little easier if the releases tomorrow print better than expected.

Traders need to be very careful being in the market around the NFP, there are many components to look at. It is essential to find the support and resistance ahead of time, let the explosion of price take place, and then let the market pull back one way or the other after the first 10-15 minutes.

The initial breakouts are always retraced, let the market show which way it wants to go, check that the Usd is running the same direction against all of the major pairs, and ensure that at least three five minute candles have closed after the release before looking to trade. The Asian markets are closed by the time NFP is released, they will pick up the baton on Sunday evening, so do not be in a hurry to get involved, if it comes your way then get on board, but do not let the Non Farm Express run you over; it has got to be on pre-set criteria.

The easiest reaction is going to be gauged in the equity market; if Wall Street moves stocks higher, the dollar will likely get weaker. If stocks are pushed lower Treasuries will increase their yield and the dollar will very likely get bought.