Last night's lower than expected Japanese Merchandise Trade Balance surplus is the latest example of the impact of rising oil prices on that country's economy. Although volume of oil imports rose just 0.4% prices exploded by 49.2% and as a result the Trade Balance surplus contracted to 116.2 Billion yen vs. expectations of 387.2 Billion yen - the lowest value since 2003. Oil also had an impact on the Tertiary Industry index, the measure of the Japanese service sector, which ticked lower to -0.8% from -0.7% expected.

Ironically enough the rise in oil and to a much lesser degree the rise in other commodities such as copper may be bullish for the greenback since all of these products are denominated in dollars. The Japanese importers need for more dollars is just one case in point of how trade flows are benefiting the US currency in the FX market. How else can one explain the strength of the unit given US atrocious balance sheet position?

In the near term, however, both the EUR/USD and the USD/JPY are treading water with markets warily watching Hurricane Rita, which has now been upgraded to Category 5 and is quickly becoming the third strongest storm on record. While all of the meteorological speculation has frankly become a bit ghoulish, computer models do point to the possibility of a hit on Galveston and even Houston.  Should that happen both the physical and economic ramifications would be severe. But until we know for certain the extent of the damage, the markets are unlikely to move either way especially in the EUR/USD caught in the crosscurrents between the turmoil in Germany vs. the oncoming wreckage in the Gulf.

Boris Schlossberg is a Senior Currency Strategist at FXCM.