May 15, 2018 / 5:05 AM / in 10 months

UPDATE 1-Hong Kong Exchange Fund Q1 investment income weakest in five qtrs

(Adds HKMA chief comment, details)

HONG KONG, May 15 (Reuters) - Hong Kong’s Exchange Fund, which is used to back the Hong Kong dollar, posted an investment income of HK$26.1 billion ($3.32 billion) in the first quarter, the Hong Kong Monetary Authority (HKMA) said on Tuesday, its worst performance in five quarters.

The figure compared with an adjusted HK$64.9 billion investment gain in the same period a year earlier, and investment income of HK$66.0 billion in the fourth quarter of last year.

In 2017, the exchange fund saw its investment income hitting an adjusted record high HK$264.0 billion.

“Last year we have achieved an unprecedented high level of profits...but this year we are facing uncertainties in the financial market,” HKMA Chief Executive Norman Chan told reporters, citing interest rate rising faster than expected, intensifying trade conflict between China and the United States, as well as geopolitical tension in the Middle East.

The HKMA is the key manager of the Exchange Fund, which is under the control of the financial secretary and invests in equities, bonds, foreign exchange and other securities and assets.

Commenting on the recent capital outflow, Chan said a widening spread between Hong Kong dollar and U.S. dollar’s interest rates attracts arbitrage.

“Capital flowing out from Hong Kong dollar will allow Hong Kong dollar’s interest rates to eventually normalize like the U.S. dollar,” Chan said.

On Tuesday morning, Hong Kong dollar hit 7.85, the weakest level of trading band.

The Hong Kong dollar is pegged at 7.8 to the U.S. dollar, but can trade between 7.75 and 7.85. Under the currency peg, the HKMA is obliged to intervene when the Hong Kong dollar hits 7.75 or 7.85 to keep the band intact.

As the former British colony pegs its currency to the dollar, its money market rates should mirror those of its U.S. counterpart, but the gap has now widened to around one percent since the Federal Reserve started raising interest rates from ultra-low levels adopted during the 2008 financial crisis. ($1 = 7.8498 Hong Kong dollars) (Reporting by Twinnie Siu and Clare Jim Editing by Eric Meijer and Gopakumar Warrier)

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