Sterling rose in Asian trade on Thursday against a basket of major rivals, extending gains for the third day against yen and scaling fresh 16-year highs. 

The UK-Japan interest rate gap remains massive and in favor of the UK, and it’ll likely remain so for some time, in turn boosting the pound against the yen. 

On the other hand, the Bank of Japan continues to monitor the extreme weakness of the local currency without direct interventions, after recent weak Tokyo data showed the world’s third largest economy still needs further stimulus and lower interest rates for an extended duration.

The Price 

The GBP/JPY pair rose 0.2% today to 207.95, the highest since 2008, with a session-low at 207.56. 

The pair rose 0.7% yesterday, the second profit in a row following aggressive remarks by a BOE official. 

Selling Pressures

The forex markets continue to sell off the yen against main rivals amid doubts the Japanese authorities will actually intervene to boost the currency.

Rate Gap

The interest rate gap between Britain and Japan currently holds at 515 basis points in favor of the UK, which is highly supportive of the pound, especially as the odds of UK interest rate cuts this year fizzle out. 

On the other hand, the Bank of Japan is unlikely to raise interest rates any more this year. 

The BOJ

At the June 14 meeting, the Bank of Japan maintained the current purchases program of government bonds, valued at 6 trillion yen ($38 billion) a month.

The bank did announce plans to reduce purchases in the next year or two, to be delineated at the July meeting. 

It would’ve been such a crucial step towards normalizing policies in Japan, potentially leading to rate hikes. 

However, as Japan sank deeper into recession, it’s now less likely the BOJ will carry through such aggressive plans. 

When Reuters reported earlier this month that Asian oil imports fell moderately in the first half of the year, many traders focused immediately on China, the world’s largest crude importer. 

During the first half of the year, China imported 11.8 million bpd, which is down from last year’s average of 11.28 million bpd. 

China has also figured strongly in all forecasts about oil demand and prices, as daily Chinese imports alone outstrip the entirety of EU consumption. 

Bloomberg reported this month that forecasts for oil prices in the second half of the year became uncertain, as demand growth in China missed estimates, while refinery output in the country was slower than expected as well. 

Bloomberg’s analysts noted that higher oil prices in recent months could’ve stymied China’s appetite for the commodity, as they now expect China’s crude imports to move sideways around 11 million bpd in the third quarter, with a persistent downward risk. 

Put simply, China is sensitive to prices, just as any other importer, and the higher the prices, the less interested the Chinese become in buying large amounts of oil.

A crucial part of the puzzle is China’s weakening growth rate and struggling real estate sector, and the burgeoning EV sector, which are all factors that might reduce long-term oil consumption. 

There are now official Chinese estimates that oil demand will peak in three years, and will continue to taper off after that date. 

However, the future might not be so bleak for oil, as EV adoption rates slow down sharply everywhere except China, and another important point is that 60% of demand on oil right now comes from petrochemical producers and not the automotive industry anyway.

As for China, it’s clear that it’ll remain a major player in the oil market for decades to come, however it’s important for oil traders and investors to restrain their Chinese growth forecasts to more realistic levels. 

The Energy Information Administration reported a drawdown of 3.4 million barrels in US crude stocks last week to 445.1 million barrels, while analysts expected a buildup of 0.7 million barrels. 

Gasoline stocks fell by 2 million barrels to 229.7 million barrels, while distillate stocks surged by 4.9 million barrels to 124.6 million barrels. 

US stock indices rose on Wednesday ahead of important inflation data, with S&P 500 extending gains for the seventh straight session.

Tomorrow, US consumer prices data for June will be released, expected to show an increase of 0.1% m/m, and 3.1% y/y. 

Core prices, excluding food and energy, are expected up 3.4% y/y.

The US corporate earnings season for the second quarter is commencing this week, with a slew of companies reporting results, including City Group, Wells Fargo, JPMorgan, Pepsico, and others.

On trading, Dow Jones rose 0.5%, or 178 points as of 17:43 GMT to 39,470, while S&P 500 rose 0.6%, or 32 points to 5609, as NASDAQ climbed 0.8%, or 149 points to 18,582.