Brexit can be avoided

Our base-case remains Brexit can be avoided, given the unlikelihood of wanting to risk weaker ties with our main trading partner and a diluted relationship with the US and other third-parties using the UK to access the Single Market. Inertia could also play a part – as it did in 1975, when the UK survived its first inout referendum. Turnout was 65%, with 67% voting 'in'.

The turnout this June could be just as high, given emotively charged issues such as fiscal profligacy and immigration. Yet bookmaker predictions of a similar two-thirds/one-third vote look complacent against polls suggesting the 14-17% 'don't knows' will swing it on 23 June. Should Brexit occur, getting here is now clarity who will contest this year’s US presidential race. Unfortunately, that may be the only thing clear in a campaign which has set new standards for unpredictability. Donald Trump's candidacy was met with derision a year ago. Until his rivals quit, many were sure we were set for a contested convention. Why should the unpredictability stop now? The distraction of a Hillary Clinton-Trump matchup could subdue sentiment over the next few months, but it may also direct market attention from the more important questions about what fiscal policies we should expect from this political transition. At the moment, our concern is we will not get what would to the next stage would be a long, drawn-out can of worms. Even a 'soft exit' – where trade relationships and freedom of movement are broadly maintained – would probably need several years just to end up close to square one. Greenland’s (EEC) departure in 1985 took three years. The UK – much larger and, after 43 years, more entwined in the European project – would need even longer.

Brexit would then risk a spillover into the remainder of the EU. A 'trap door' opened by the UK could well be approached by others. This questions the EU as a relative haven. In which case – given the second-round effects and the ECB’s ongoing QE – Brexit would probably benefit the US dollar and Japanese yen.