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Riding The Non-Farm Express

NFP Friday is a conundrum, and one that plays out literally for weeks after the estimated numbers have hit.

The volatility of the 1st Friday of each month when Non-farm Payroll is released is not just down to the number of jobs created or lost, it is the complexity of the release that tends to create price carnage and chaos, with four components that traders should be aware of before approaching their trade station.

The release tends to follow the rate decisions from the ECB and BOE the previous day, it is always close to the well respected ISM economic surveys and ADP and Weekly Jobless Claims, which does nothing to help tame the volatility. The fact that Asian markets are closed and European trade desks are into the last leg of their day, also adds to the scramble to quickly find stable dollar valuations.

The four NFP components are:

1. The actual number of jobs reported as being generated (or lost) is important, especially as the high-to-low difference between analysts is enormous, putting pressure on the market to have to find fair value soon after the (historically unreliable) numbers hit.

2. The revision to the previous month's number is probably as important as the new number. The adjustments can add up to 100,000 to the previous month's reports, either way, and that creates volatility as traders re-align their previous thoughts on what happened four weeks ago.

3. The employment rate; currently just under 10%, up from the 4% in June 2007, and a number that many think will lag the NFP read, with some months showing positive jobs but an increased unemployment percentage (confusing?).

4. The average hourly earnings is the number that the Fed has stated would cause concern as an inflationary read. Wage increases stoke inflationary pressures and the FOMC members have said that they are as concerned with future inflation, (cough, cough.....really?), as they are the housing and employment market.

If the NFP prints in the positive, as expected, and the revision stays close to last month's number, with the unemployment rate staying under 10%, and the hourly earnings post as expected, automated algorithms will pick up on price action in Treasury and equity trade, and gauge that trader sentiment is buying into the thought process that the worst of the credit-crisis is in the past.

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The automated analysis will decide that inflationary pressures are solely due to the amount of dollars now in circulation, and therefore no interest rate increases are likely from the Fed in the next 6 months at least, and that may strengthen the Usd initially.

However, the inverse correlation of Equity Up/Usd Down may take over, supported by the high frequency trading patterns that now dominate the gladiatorial trading arena each day, and would translate into selling of the greenback as equity and oil markets move higher, ignoring the reality that the imbalanced debt-to-growth ratios are at historic highs, inter-bank lending is at historic lows, mutual fund redemptions are at historic highs, and the residential and commercial property sector will continue to drag on economic growth.

Those are all worries for another month, maybe September or October when sentiment takes stock of the fast approaching year-end, and the book balancing exercise that tends to suit those with a negative predisposition gets underway. After all, this is Friday; the end of the week and even a dusty old survey that has a propensity to be continually miss-guided and unreliable should provide a summer-time glass half full outlook.

Any dollar strength on Friday may be quickly reversed if equity markets do pick up on any meager signs of economic 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, regardless of the fact that equities are able to melt up or down with ease, backed by daily trading patterns that defy gravity for any given reason on any given day.

Traders need to be very careful being in the market around the 08:30 EST on the first Friday of the month, because of the many components of the NFP for the market to absorb. It is essential to find the main support and resistance areas ahead of time, let the explosion of price take place, and then wait for the market to pull back, one way or the other after the first 10-15 minutes.

The initial break-outs are invariably retraced, so let the market reveal which way it wants to go, after the initial break. 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. Trading NFP Friday's has got to be on pre-set criteria.

The easiest reaction is going to be gauged in the equity market; if stocks, oil, and gold move higher, the dollar will likely get weaker. If stocks are pushed lower, Treasuries will increase in value and the dollar will very likely get bought in the near-term. It really is not about the NFP number, it is about the automated high-frequency trading reaction.

NFP Friday is a conundrum, and one that plays out literally for weeks after the estimated numbers have hit, especially now that the flight-to-safety has no parachute, no route-map, and no rules. Safety in bonds is a thing of the past, Treasury yields are pathetically low, equities are extremely volatile, yesterday's villains are today's heroes, and the long-term investor is left scratching around in the dust as intra-day traders get in, get done, and get out.

It will be seen again on Friday, as fair value is fought over, and boundaries are set for August, in reaction to the Non-farm Circus pitching the Big-Top on Wall Street. Tenured traders will be on the tee, at the spa, in the library, walking the dog; anywhere but in the market at 08:30 ET. Fore!!

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Marco Hague is one of the founders and principals of The London Forex Broadsheet (commonly known as TheLFB), a global forex trader portal with headquarters in the U.S. Hague began his career with the Bank of England dealing with foreign exchange control, and he has been trading for the last three decades. He has been involved with institutional risk asset ratio analysis and the implementation and maintenance of institutional trade desks globally.