The mood is shifting in the financial markets. With eight days until the US Presidential election, investors are finally growing nervous. The Dow Jones Industrial Average fell more than 900 points intraday and typically when there is such an aggressive one-day decline, further losses are likely. Panic selling will often lead to big multi-day moves in currencies and between record-breaking coronavirus cases in the US and Europe, dimming odds of a pre-election stimulus deal, and US election uncertainty, investors have plenty to be worried about.

This is a big week in the markets. Not only will time run out completely if the White House can’t compromise with House Speaker Nancy Pelosi but the second COVID-19 wave caught European nations completely unprepared and many are tightening restrictions to control their outbreaks. Unfortunately, the localized piece-meal approach is not working and some nations could be forced to impose a nationwide lockdown and if one major country decides to do so, others could follow. We’re watching France very closely as they reported 52K new virus cases on Sunday. This is now almost seven times more cases than their first wave peak in March. For now, the euro refuses to fall but a return to a complete nationwide lockdown in some of the Eurozone’s biggest countries could be the tipping point for the currency. The European Central Bank’s monetary policy announcement is one of the most important event risks this week and with virus cases surging across the region, they’ll have no choice but to set the stage for easing before year-end. Diversification out of US dollars is the only reason why EUR/USD is still trading above 1.1800 but even that may not keep the currency supported for long.

There are a number of factors that could affect how the US dollar and US markets trade this week. Aside from the upcoming election, third-quarter GDP numbers are scheduled for release and it’s a busy earnings week. GDP growth is expected to snap back sharply in Q3 and if it does, there’s no doubt President Trump will try to point to this improvement as a reason for not encouraging more restrictions despite record-breaking new virus cases and a 40% surge in hospitalizations over the past month. The federal government has basically given up with the White House Chief of Staff saying the administration is not going to control the virus – opting instead to focus its efforts on vaccines and treatments. Some states like Chicago and New Jersey have announced their own curfews (the city of Newark issued an 8pm curfew for all non-essential businesses) and more could follow. Weak earnings could also accelerate the slide in stocks – some of the biggest tech names are reporting this week.

All of the commodity currencies succumbed to risk aversion today with the Canadian dollar leading the slide. The Bank of Canada is not expected to change monetary policy this week but recent global developments and the ongoing closure of the US-Canada border should leave them cautious. New coronavirus cases are also on the rise in Canada albeit at a far slower pace than the US and Europe. The New Zealand dollar was the most resilient currency, falling only slightly against the greenback. New Zealand trade data is scheduled for release this evening and the uptick in the manufacturing PMI index signals a potentially stronger release.