Markets Are Waiting to See How Virus Progresses: BMO Capital’s Gallo

The video discusses the initial optimism in the market following the W Helfo decision, which quickly faded as investors adopted a wait-and-see approach regarding the virus's spread. The focus shifts to China's economic challenges, including trade issues, debt levels, and the Wuhan virus, raising concerns for investors. The discussion then covers expectations of more stimulus from the PBOC and the Chinese government's currency management strategies. Despite the coronavirus outbreak, FX market volatility remains subdued compared to other asset classes, as FX is seen as a sideshow in the broader economic context.

What was the initial market reaction to the W Helfo decision?

• Indifference as it had no impact

• Confusion about the decision's implications

• Pessimism due to worsening virus spread

• Optimism due to efforts to contain the virus

Why is the situation in China particularly important for investors?

• China's financial system is isolated from global markets

• China's trade situation and debt levels impact global markets

• Investors have no exposure to China

• China's economy is unaffected by the virus

How might the PBOC respond if the virus spread does not worsen significantly?

• Peg the currency to the Euro

• Completely deregulate the currency

• Ban all foreign currency exchanges

• Allow Dollar RMB to trade in a specific range

What is the expected behavior of China's currency management?

• Completely free-floating

• Orderly and controlled

• Disorderly and unpredictable

• Pegged to the US Dollar

Why has FX volatility remained subdued compared to other asset classes?

• FX markets are closed during the outbreak

• FX markets are heavily regulated

• FX is considered a sideshow with no clear medium-term impact

• FX markets are more volatile than equities