Canadian dollar pares its decline after hitting two-week low on Saudi dispute

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar weakened to a two-week low against its U.S. counterpart on Wednesday but pared its losses as investors decided that the impact on the currency of potential Canadian asset sales by Saudi Arabia will be short-lived.

The Saudi central bank and state pension funds have instructed their overseas asset managers to dispose of their Canadian equities, bonds and cash holdings "no matter the cost", after Ottawa criticized the arrest of a female activist, the Financial Times reported, citing sources.

The kingdom said on Wednesday there is no room for mediation in the deepening diplomatic dispute.

"There has been some two-way volatility, indicative of not just price pressures on commodity currencies but also, of course, the headlines about Saudi Arabia," said Bipan Rai, executive director and North America head, FX strategy at CIBC Capital Markets.

"Then we have seen the CAD gain ground somewhat as some of the fog has cleared and investors slowly come to the realization that any sort of impact on the CAD from the Saudi selling should be ephemeral."

CIBC estimates that Canadian dollar-denominated FX reserves held by Saudi Arabia to be roughly C$10 billion to C$25 billion, or less than 10 percent of daily volume in the currency.

The price of oil , one of Canada's major exports, fell about 4 percent after Chinese import data showed a slowdown in demand and as a trade dispute between Washington and Beijing escalated.

Canada runs a current account deficit, so its economy could be hurt if the flow of trade or capital slows.

At 12:52 p.m. EDT (1652 GMT), the Canadian dollar was trading 0.2 percent lower at C$1.3074 to the greenback, or 76.49 U.S. cents, having pared its earlier decline. The currency touched its weakest intraday since July 25 at C$1.3121.

On Tuesday, the loonie touched its strongest in nearly eight weeks at C$1.2963. It benefited over recent days from data showing stronger-than-expected growth in Canada's economy in May and a record high for the country's exports in June.

The value of Canadian building permits unexpectedly dropped by 2.3 percent in June from May on weakness in the residential sector.

Canada's jobs data for July is due on Friday.

Canadian government bond prices were higher across a flatter yield curve. The two-year rose 0.5 Canadian cent to yield 2.127 percent and the 10-year gained 7 Canadian cents to yield 2.361 percent.

(Reporting by Fergal Smith; Editing by Stegve Orlofsky and Jonathan Oatis)