The Nigerian naira steadied against the U.S. dollar at the interbank market on Tuesday while yields on 3-year bonds fell after the central bank lowered its target trading band for the currency and kept benchmark interest rates on hold.
The central bank moved the band it wants the local naira currency to trade in to 150-160 naira to the U.S. dollar, compared with 145-155 naira previously, due to prolonged naira weakness and high dollar demand.
The unit steadied at 158.99 naira to the greenback at 1030 GMT, the same level it was at before the central bank's announcement on Monday, after opening lower at 159.50 naira.
"There was an initial pressure on the naira, which has moderated." one currency dealer said, adding that the market had already priced in the move, after the bank earlier on Monday auctioned $250 million at 155.21 naira to the greenback.
Financial markets had closed before Monday's announcement.
By moving the band on which the naira trades at its auctions to 150-160 naira to the U.S. dollar, the central bank wants to converge the official forex rates with the interbank and narrow arbitrage opportunities.
Analysts expected the central bank to hike rates by 25 basis points to 12.25 percent, according to a Reuters' poll, prompting bond holders to go short on the 3-year paper, dealers said.
But the bank left rates unchanged at 12 percent.
Yields on 3-year bonds, Nigeria's most liquid paper, fell 100 basis points on buying pressure from investors that went short on the paper in anticipation of a rate hike.
The 3-year papers, all nearing maturity, traded at 15.1 percent from Monday's close of 16.5 percent. The 5- and 20- year papers were not trading.
The central bank on Monday said it would hold rates to allow the impact of an aggressive 275 basis point hike it made in October to take effect, meaning that the slowdown on tightening could be temporary, analysts say.