Brazil's real rises as inflation keeps up rate hike hopes

A sharp rise in inflation in Brazil made a stronger case for an interest rate hike next month, lifting the real, while a Fitch warning on economic recovery kept Mexico's peso under pressure.

The Mexican currency was flat. Data on Tuesday showed Mexico swung to a bigger-than-expected trade surplus in April powered by record exports.

But, denting sentiment, ratings agency Fitch on Tuesday said it expects that economic recovery in the country and the Caribbean from the pandemic will lag peers given the deep economic contractions and muted recovery prospects there.

Brazil's real firmed 0.2% with a more than 7% jump in inflation for the month to mid-May. It was the biggest such rise in four and a half years, suggesting the central bank will deliver on its pledge to raise interest rates by another 75 basis points next month to 4.25%.

"There are also signs of a broader increase in goods inflation. While this inflation spike should start to unwind in the next few months, the central bank is likely to remain hawkish, with another 75bp hike in the Selic rate (to 4.25%)... in June looking almost certain," said William Jackson, chief EM economist at Capital Economics.

Separate data also showed consumer confidence in Brazil rose in May as households looked through the second wave of the pandemic.

Elsewhere, South Africa's rand scaled two-year highs. Heavily indebted power company Eskom said on Tuesday it had reduced its overall debt by 20%. Eskom debt has pressured South Africa's sovereign rating, with the company warning on Tuesday it may have to implement nationwide electricity cuts.

Turkey's lira inched closer to all-time lows after President Tayyip Erdogan replaced the central bank's fourth policymaker in the last two months, bringing its autonomy into question.

Istanbul's BIST stock index fell as much as 2.4%.

Among Latam stocks, Brazil's Bovespa hit their highest since January, while Chile's IPSA rose 1%.

Emerging economies from Peru to Romania are in the firing line as looming US tapering raises the risk of outflows from local currency bond markets, hitting a vital funding source for governments striving to recover from the coronarvirus crisis.