The chart compares copper futures with the cross rate between the Japanese yen and the Canadian dollar futures.

The basic point is that a stronger yen goes with weaker commodity prices. The yen was sharply higher yesterday but has given back some of those gains in over night trading.

The problem at the moment is that there is still a hurricane heading towards the U.S. Gulf Coast and until it either hits or misses by mid-next week the markets are going to be inclined to keep a bid under energy prices. This is August, after all.

One of the favorite pastimes of Japanese investors appears to be selling the yen in search of a positive ‘carry’ and this has provided both higher interest rates and a foreign exchange profit. The problem is... that isn’t the way the forex markets work. Low interest rates countries typically have strong currencies while higher yield countries have weaker currencies otherwise we would all be clamoring to hold blue-chip pesos. Of course the last time we looked that did seem to be an integral part of PIMCO’s strategy so perhaps we are wrong on this.

The bottom line is that currencies like the Canadian and Australian dollars rise in a strong commodity trend (see chart below). The cracks, bumps, and warts disappear from view in much the same way that there are no mortgage default problems as long as home prices are rising. When the commodity trend turns negative, however, the exchange rates can move rather dramatically. Notice how the ratio between the Canadian and U.S. equity markets finally busted the rising support line yesterday as the CRB Index broke lower. Prices may rally back today or even next week but from our perspective this has the smell of inevitability.