CANADA FX DEBT-C$ rebounds from two-week low as investors look past Saudi dispute

 (Updates prices)
    * Canadian dollar at C$1.3013, or 76.85 U.S. cents
    * Loonie touches its weakest intraday since July 25 at
    * Price of U.S. oil falls more than 3 percent     
    * Bond prices mixed across a flatter yield curve

    By Fergal Smith
    TORONTO, Aug 8 (Reuters) - The Canadian dollar strengthened
against its U.S. counterpart on Wednesday, with the loonie
recovering from an earlier two-week low as investors decided
that potential Canadian asset sales by Saudi Arabia will have a
short-lived impact on the currency.
    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,
settled more than 3 percent lower 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 3:36 p.m. EDT (1936 GMT), the Canadian dollar         
was trading 0.3 percent higher at C$1.3013 to the greenback, or
76.85 U.S. cents. The currency's strongest level of the session
was C$1.3007, while it touched its weakest since July 25 at
    On Tuesday, the loonie reached 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
    Canada's jobs data for July is due on Friday.
    Canadian government bond prices were mixed across a flatter
yield curve, with the 10-year             rising 4 Canadian
cents to yield 2.365 percent.

 (Reporting by Fergal Smith; editing by Diane Craft)