Kim Dotcom: a threat to the kiwi dollar?

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What on earth is the connection between Kim Dotcom – one of the world's biggest internet pirates – and the New Zealand dollar, you ask?

Dotcom, who is fighting extradition to the United States on piracy charges, launched a political party earlier this year to contest New Zealand's general elections on September 30.

In late-May, his Internet Party entered an alliance with the Mana Party, a small party that advocates for the nation's indigenous Maori, to improve his chances of gaining political clout.

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Their joint party, Internet Mana, is gaining popularity among young voters and is in striking distance of the five percent threshold needed to guarantee representation in parliament, according to the One News-Colmar Brunton poll published on August 17.

"Fears that the infamous web entrepreneur Kim Dotcom may be starting to influence the New Zealand election is affecting the currency. Mr. Dotcom's party has aligned itself with the Maori party and is polling at 5 percentage points – a big enough swing in New Zealand politics that could possibly give the ruling majority to the opposition Labour party," Boris Schlossberg, Managing Director of FX Strategy at BK Asset Management wrote in a note.

"Such a move leftward would no doubt shake up the currency markets which have been caught by surprise expecting yet another win by the National party that would maintain the economic status quo," he said.

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A challenge for the incumbents

The National Party-led coalition - headed by Prime Minister John Key and Deputy and Finance Minister Bill English - is lauded for its success in steering the country through the global financial crisis and aftermath of the devastating Christchurch earthquake of 2011.

A government led by the main opposition Labor party is viewed as unfavorable by investors.

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"A Labor/Green-led government most likely with the support of the more radical small Internet/Mana left element and a populist centrist NZ First would be regarded as unstable and damaging for business confidence," said Greg Gibbs, head of Asia Pacific markets strategy at RBS.

The National Party is currently leading the Labor Party in the polls by a wide margin, at 50 percent and 26 percent, respectively. However, the National Party has been losing support.

Earlier this month, Key predicted a close general election, saying, "If we could poll 50 percent on election night that would be great, but the truth is MMP [Multi-Party Proportional voting system] is an environment that's tough, it's hard fought and it's always close."

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The complex MMP voting system tends to emphasize the role of minor parties and force the major players into coalition governments.

Beware kiwi dollar

Schlossberg says any significant chance that the left-leaning Labor may wrest control of the government could push the New Zealand dollar-U.S. dollar pair towards $0.80 over the next few weeks.

The Kiwi dollar has been under pressure recently, falling 3.5 percent against the greenback since late July when the Reserve Bank of New Zealand (RBNZ) signaled a pause in rate increases. The pair traded around $0.8362 on Wednesday.

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Gibbs adds while Labor is not that different overall from the Nationals, the former has a policy to change the RBNZ Act and give the central bank a new policy tool which is likely to have significant negative implications for the currency.

"Labor has proposed allowing the RBNZ to adjust mandatory retirement payments as an alternative to adjusting interest rates with the aim of influencing the exchange rate to target a more balanced national current account. It is a radical proposal that may not find its way into policy, but just the possibility of it may cause the NZD to come under pressure," he said.