Yen weakness on the re-election of the LDP in Japan appears to anticipate the new government pressuring the Bank of Japan to further increase liquidity. While this may eventually be the case, and while favouring Yen weakness overall, in the short term overbought signals point to a short trade in CAD/JPY.

Trading currencies in a world of "competitive devaluation" presents challenges, as traders taking short positions in USD have found. When currency traders anticipate the effects of monetary stimulus, timing and market positioning effects can unnerve the strongest traders.

I believe this is one of the reasons for recent Yen weakness - traders attempting to get into the trade, ahead of any formal announcements, to avoid damage from these market dynamics. And in the case of CAD/JPY, the RSI is pointing to a correction.

CAD/JPY  Daily

20121218 cadjpy

Source: CMC Tracker

Note the extreme levels of the RSI, and how past readings at this level have preceded major sell offs (the red arrows). Past performance is not necessarily a guide to the future. But as Mark Twain said "History never repeats, but it rhymes".

More conservative traders may wait for a breach of the 85.00 level before shorting. My view is that any correction is unlikely to result in a deep fall, and so I'm looking at the following trade:

Sell CAD/JPY at current levels, stop loss above 85.55.

I'm also looking at adding to the position should a breach of 85.00 occur.