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In good times, currency investors known as carry traders buy up higher-yielding currencies and sell off lower-yielding currencies.

In bad times, the opposite occurs, as these interest-chasing currency traders have to close out those positions. This triggers buying pressure on the low-yielding currencies and selling pressure on the higher-yielding currencies.

Well right now, low-yielders like the Japanese yen are losing their luster. Through much of 2010 and all of 2011, the yen was the place to be. But ever since the calendar flipped over to 2012, all of that has changed. Check it out on the weekly, three-year chart below of the Japanese Yen ETF (FXY).

A Weakening Yen is Actually a Good Sign For the Global Economy

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Going into 2012, you can see a sharp sell-off in the yen that broke its green uptrend line, which had lasted for over a year and a half.

But now, the yen is confirming its newly budding downtrend by forming a lower high (as emphasized by the red line). Yen traders are now selling every rally upward and each major high stalls out at a lower level than the former ones.

While that may be a bad thing for yen buyers, it’s not a bad thing for the global economy. If traders are selling the yen, then they must feel that the worst part of this financial storm is behind us.

I’m not sure the sun has come out just yet, but I believe the worst of the storm very well may have already passed. And a falling yen is just one more sign of that.

Investors are fleeing this low-yielder for higher-yielding currencies once again.

That also bodes well for stocks and commodities, which perform better in “risk on” environments rather than “risk off” environments like we just came out of.

Things are looking up … for the first time in a very long while!

Have a nice day!

Sean Hyman
Editor, Currency Cross Trader

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