Consider the following scenario.
First, the news that Boris Johnson favours Out causes a sell-off of Sterling, and a credit downgrade for the UK.
Second, the commentariat explains why this happened, concluding – as I suggested in a previous post on my blog – that it is because markets take the macroeconomic consensus view that Brexit would be bad for the UK, and, regardless, entails a number of severe event risks.
Third, voters slowly appreciate this, and polls tilt decisively towards Remain, compressing the uncertainties in Sterling assets, lowering the probability of Brexit, and Sterling recovers.
The panic and uncertainty are not themselves good, but ultimately it saves the Remain campaign, as prices reveal the risks that Boris seeks to downplay in his Telegraph column, and the consensus central-case view that Brexit would be a mistake.
This article was originally published on Long And Variable, and can be found here.
