The Nigerian central bank held a treasury auction on Wednesday to try to lure foreign investors, traders said, hours after it was announced that the president told the bank to ban access to dollars for food imports to curb demand.
Pressure has been building on the naira currency as oil prices drop and foreign investors book profits on local bonds in response to falling yields. Crude sales account for 90% of foreign exchange earnings and two-thirds of government revenues in Nigeria, Africa's top oil producer.
Banking stocks fell 1.26% on Wednesday, to help drag the main share index to a more than two-year low as negative sentiment persisted on the stock market.
Traders said the central bank asked them to increase their rates at a bills auction on Wednesday compared with rates that the bank paid at the last sale in July.
The move led to a spike in yields on the one-year treasury bill which rose to 12% on Wednesday from around 10% on Friday after the bank told dealers to bid higher rates at its auction, traders said.
Traders said the central bank wanted to offer bills at higher rates to attract foreign investors to boost liquidity on the currency market, which would help support the naira.
On Friday, the naira eased to 364 per dollar, from a quote of 363.50 as falling oil prices tightened liquidity on the currency market.
A dollar shortage was initially caused by a slowdown of foreign inflows after local debt market yields declined.
"As the naira came under increasing pressure ... stepping up demand management policies in the foreign exchange market furthermore suggests that the central bank faces increasing problems propping up the currency through open market operations," said Malte Liewerscheidt, vice president of Teneo Intelligence.
Nigerian President Muhammadu Buhari on Tuesday told the central bank to stop providing funding for food imports, his spokesman said, in a further sign of pressure on the currency.
A spokesman for the central bank, which is an independent body, has not responded to text messages and phone calls seeking a comment on whether or not the request will be heeded.
Traders said the market was waiting for more information on how such a ban would be implemented, especially for importers with existing lines of credit.
"This adds to the level of uncertainty in the market. How the central bank would implement this remains unclear," one trader said. "Some of the items may already be included in the earlier ban."
The central bank in 2015 banned access to foreign exchange for 43 items in a bid to curb dollar demand, though it continued to sell dollars to offshore investors to boost confidence.
Nigeria, which has Africa's biggest economy, operates a multiple exchange rate regime, which it has used to manage pressure on the currency.
The official rate of 306.90 is supported by the central bank but the traded rate of 364 is widely quoted by foreign investors and exporters.