Reserve Bank scheme news knocks kiwi

21:00, Mar 19 2013

The New Zealand dollar lost ground against the greenback overnight, after investors were spooked by news of a Reserve Bank scheme which would mean a partial loss on all deposits if a bank fails.

The kiwi recently traded at US82.36 cents, down from US82.59c at 5pm yesterday, while on the Trade Weighted Index of major trading partners' currencies it remained unchanged at 75.90.

The Reserve Bank's Open Bank Resolution (OBR) plan, due to come into effect at the end of June, would mean a partial loss on all deposits if a bank failed in New Zealand, in order to fund the bank's bailout.

The alternatives would be a deposit guarantee scheme, a potentially costly government bailout, or a disruptive liquidation of a failed bank.

A similar plan to bail out banks in Cyprus met strong opposition on news depositors would probably lose 10 per cent of their account balances in a one-off levy. Cypriot lawmakers rejected the plan overnight, with 36 votes against the bill, 19 abstentions and zero in favour.

In New Zealand, Fonterra's overnight dairy auction saw prices soar to a five-year high due to supply issues caused by the North Island drought.

The average winning price at the auction rose to US$4683 ($5685) a metric tonne, up from US$4216.

But the news of the auction appeared to be overshadowed by the OBR plan.

ASB Institutional Head of FX Sales Tim Kelleher said the kiwi seemed to be "struggling" after news of the OBR plan was posted on a well-known United States website.

"We think that the dairy offer's been ignored due to the news of the Open Bank Resolution," he said.

The coverage of the OBR, in conjunction with the Cyprus bailout plan, had put a dent in risk sentiment he said, adding: "It may be causing some concern out there."

The weak euro and negative equity markets were also factors for the kiwi's dip, he said.

Investors will be watching the GDP announcement by the Reserve Bank tomorrow, where Kelleher expected a $3 billion deficit.

On the crosses, the kiwi recently traded at 79.42 Australian cents, down from A79.46c at 5pm yesterday, and 78.31 yen, down from 78.86 yen. It opened at 63.96 euro cents, up from 63.70 euro cents, and 54.53 British pence, up from 54.46p earlier.

Kelleher expected the kiwi to trade in a range between US82.10c and US82.60c, but any sustained coverage of the OBR would put more pressure on the local currency.