FXStreet (Bali) - According to Yujiro Goto, FX Strategist at Nomura, USD/JPY is expected to appreciate further towards 125.00 by year-end as the market prices a higher chance of a December rate hike. Key Quotes "USD/JPY reacted positively to strong US NFP last Friday and momentum has stayed strong so fa. We now assign a 75% possibility to the Fed starting hiking in December. The 2yr rate differential between the US and Japan has widened further, and is now approaching 0.90%, the widest spread since April 2010." "USD/JPY has been trading strongly as the rate spread widens, but the appreciation has been relatively muted, given the size of the increase in US 2yr yields. JPY short positions are relatively small. JPY short positions at IMM rose further as of last Tuesday to -$4.5bn from -$3.5bn the previous week." "We estimate JPY short positions to have increased further to -$5.8bn by end-Friday, but JPY short positions are still likely smaller than the recent peak in mid-August (-$10.5bn.)" Risk sentiment likely remains one of important drivers for USD/JPY, but so far it has been resilient while the market sees a greater likelihood of the Fed hiking in December. Economic data have been healthy recently in the G10 space and our G10 surprise index is now at the strongest level since early January." "A higher chance of a December lift-off for the Fed and market reactions so far suggest the likelihood of near term BOJ easing is now even lower. However, investors' expectations for near-term easing by year-end were likely already low before the US NFP data. This should limit the room for the market to reprice lower the chance of BOJ easing." "Thus, we expect JPY to continue to depreciate against USD as the market prices a higher chance of a December rate hike. Positioning and small JPY short positions should enable USD/JPY to test 125 again by end-year." For more information, read our latest forex news.