It not about BREXIT, it’s about the election!
British Prime Minister Boris Johnson is, and has only been, focused on the forthcoming election. Brexit is little more than a device that he hopes to use to secure a majority-win for his party. This is not a criticism of Mr. Johnson. No politician can achieve great things from the opposition benches. I believe that Johnson calculates that his chances of success are higher if the Brexit party, led by Nigel Farage, is not contesting the next election. The only way that Johnson can guarantee that is to take away the Brexit party’s very reason for existence. If Brexit does not happen by the October 31st deadline Nigel Farage’s Brexit Party will contest the next election and the parties will line up as follows:
We can see that the Conservative party will have to battle in the centre-ground with Labour for soft Brexit votes and do battle with the Brexit party for hard Brexit votes. This two-front election campaign is less desirable than the proposition below:
If a hard Brexit occurs, the Brexit Party will no longer have its raison d’etre and would be unlikely to feature in the next election. This will leave the Conservatives as the only significant party that clearly represents that part of the electorate that wanted Brexit. The opposition would be crossed between advocating for renewed admission to the EU or complaining about how Brexit was achieved. Labour may struggle to find a voice here.
It is important to note that a soft Brexit does not guarantee the absence of the Brexit Party from any future election campaign. They may run on the basis that they need to ensure that the two years of negotiations that follow Brexit are influenced by the presence of Nigel Farage in the British Parliament. Only a hard Brexit on October 31st truly vanquishes Farage and allows Johnson the greatest chance of becoming PM at the head of a stable majority government. Then he can reapply for EU membership or do whatever pleases him for 5 years.
The most likely outcome is a soft Brexit. However in our view the market is underpricing the possibility of a Hard Brexit. We have taken advantage of this by building an asymmetrical trade that provides us with a lot more upside than downside if we are right. A downward move in GBP/USD makes it possible for us to make some money, but a downward move and volatility (chaos) makes it possible for us to make a lot of money.
Furthermore it is worthwhile pointing out that our Brexit trade is the smallest of 13 open positions that we have in the market at the time of writing.