When you invest internationally, currencies can be a source of profit or a source of pain. Too many investors venture beyond the U.S. without properly evaluating their currency exposure. International investment without proper currency evaluation is akin to crossing the street and only looking one way: You could get blindsided by a bus.

When Argentina revalued its currency in 2002, U.S. investors owning stocks in Argentina took a lashing of more than 50%. Citizens of Argentina, however, enjoyed an 80% gain on their investment. Developing countries are not the only countries susceptible to large currency fluctuations. In the late 1990s, the depreciation of the Australian dollar against the U.S. dollar turned a 60% return on Australian stocks into a 7% return for U.S. investors owning Australian stocks.

Just as a depreciating currency can zap the pizzazz out of an otherwise good investment idea, an appreciating currency can turn a good investment idea into a great investment idea. Take the U.K., for example. Since year-end 2002, the U.K. stock market is up 64%, but U.S. investors are up 104% in the same stocks over the same time period. An appreciating pound added another 40% to the returns of U.S. investors. The opportunity in currency investment is too important to ignore.

It's no secret that the yen is one of the most undervalued freely floating currencies in the world. The Economist does a semiannual survey of the cost of a McDonald's Big Mac in 46 different countries to estimate currency values. This Economist's survey is a nice back-of-the-matchbook indicator of currency values. In the latest survey, the yen comes up undervalued by 28% against the U.S. dollar. But I wouldn't give up on the yen and Japan just yet.

The yen is deeply undervalued because it is a victim of the so-called "carry trade." The carry trade is an investment strategy whereby leverage-seeking investors borrow yen at low interest rates and invest the proceeds in higher-yielding non-yen-denominated securities. The mechanics of the carry trade require investors to sell yen. The popularity of the investment strategy has been a force driving down the exchange rate value of Japan's currency. The carry trade is akin to picking up nickels in front of a steam roller. You better not trip. The high risks of the carry trade make the speculators employing the strategy a trigger-happy bunch. The most minor event can send carry trade investors into a selling frenzy. I cannot tell you when the carry trade crowd will exit their trades, of course, but I can tell you that when the frenzy starts, the yen will soar.

For instance, in 1998, the last time the carry trade was unwound, the value of the yen appreciated by 22% versus the dollar in just 60 days. In 1998, the popularity of the carry trade was much lower than it is today. A swift and powerful move up in the yen is likely.

Even without an unwinding of the carry trade, Japanese equities offer relative value. If the carry trade continues to grow in popularity, the yen will continue to depreciate against the currencies of Japan's major trading partners. Further depreciation in an already undervalued yen will be a windfall for Japanese exporters. Higher corporate profits and higher equity prices are likely in this scenario. So even in the toughest of times for the yen, Japanese equities do still have some appeal--and lots of potential--thanks in part to a "carry trade" crowd that could explode at any time.

Canada is the forgotten stepchild in many global investment portfolios. The country is lumped in with the United States, but there are important differences. Canada is the second-biggest country on earth, the eighth-largest economy in the world, and a natural resources powerhouse. Canada is rich in timber, diamonds, precious metals, industrial metals, energy, and, the most valuable resource of the future, water. Canada is home to 20% of the world's fresh water supply.

Canada's tar sands are home to an estimated 1.7 trillion barrels of oil, more than 6X the reserves in Saudi Arabia. Using current technologies, recoverable reserves from tar sands are estimated at 300 billion barrels of oil.

Growing demand for natural resources from Asia's booming economies is certain to bode well for Canada's future economic prosperity, and strong economic growth leads to long-term currency appreciation. Canada is the only big industrialized country to consistently run a budget and current-account surplus.Fidelity Canada (FICDX) offers attractive Canadian dollar exposure. Other Canadian companies that I like include: Aber Diamond (NASDAQ: ABER), Alcan (NYSE: AL), and Bombardier (TORONTO: BBD.B).