Banking and Sovereign Worries Hit Europe, RBA Decision Upcoming

Labour Day holidays did not mean a quiet market on Monday as sovereign and financial worries sparked another round of risk aversion. CHF and USD were the best performers while the commodity currencies lagged. The market will shift its attention to Australia in the upcoming session as the RBA renders a rate decision.

EUR/USD gapped lower on banking worries after closing last week at 1.4202 and tracked as low as 1.4060. The huge US mortgage security fraud charges announced late Friday triggered a rout on European stocks with Germanys DAX falling 5%.

The worries were compounded by the resignation of the CEO of embattled bank Dexia. Rumours of a sovereign credit rating of Italy by Moodys also spread as leaders there failed to reach a consensus on how to reduce deficits. In Germany, Merkels party suffered a rout in regional elections, weakening the governing party. EUR/USD has fallen in five straight sessions after hitting a seven-week high last Monday.

Cable broke below the mid-August lows to the lowest since July 18. Commodity currencies all lagged with NZD falling below 0.8300 after trading above .8500 on Friday. Gold touched above $1900.

At 0130 GMT, Australian home loans data is expected to show a 1.6% increase in July after a flat reading the month before. The report will have minimal impact on markets ahead of the RBA decision and statement at 0430 GMT. With Mondays fall, AUD/USD looks vulnerable down toward 1.0465, especially if the pervasive worries that started the week continue to build. For more on the upcoming RBA decision see Patrick Urbans earlier preview.