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UPDATE 2-Bank of Canada sees reduced economic risk from global trade disputes

Tessa Vikander

(Adds C$, details from Poloz news conference, recasts lead paragraph)

VANCOUVER, Jan 9 (Reuters) - The potential downside risks from global trade friction seem to have eased although much uncertainty remains around implications for Canada's economy, which was hurt by temporary factors in recent months, Bank of Canada Governor Stephen Poloz said on Thursday.

"Certainly, it seems that the potential downside risks have eased as the United States and China approach a deal. This all bears watching during the coming year," he told a business audience in Vancouver.

Poloz also said there was still plenty of uncertainty about what a U.S.-China deal could mean for Canadian exports and whether any more of the new tariffs the superpowers have imposed on each other could be rolled back.

The Canadian dollar strengthened 0.2% to 1.3063 per U.S. dollar, or 76.55 U.S. cents, after Poloz's remarks, clawing back some of its earlier losses. Earlier in the day, the loonie hit a near two-week low at 1.3104.

The Bank of Canada's next overnight interest rate decision is set for Jan. 22. The Bank has held firm since October 2018 even as several of its counterparts have eased.

'SOME IMPROVEMENT'

Canada's central bank has repeatedly expressed concern that the country's trade-dependent economy is vulnerable to protectionist actions.

"On the surface, there has been some improvement on this front lately, although it remains to be seen whether this will lead to a recovery of trade and investment," Poloz said, noting companies are understandably reluctant to make big investments.

On a more cautious note, Poloz said the bank will be watching the data to see if a recent slowdown in job creation persists.

Data last month showed that the economy shed more than 70,000 positions in November. The December employment report is due on Friday.

Analysts have said a recent string of unimpressive domestic data could point to fourth-quarter annualized economic growth coming in below the central bank's 1.3% forecast in October.

Poloz said on Thursday the data had been mixed, telling reporters in a news conference the fourth quarter had seen some unusual weather and strikes.

"The Bank seems to be reserving judgment on two fronts, in terms of whether the trade situation will actually be improving, and on the less optimistic side, whether the recent softness in employment data represents a new trend," said CIBC Chief Economist Avery Shenfeld in a note.

Poloz also said if the housing rebound continues the bank will be on the lookout for signs of "froth." (Additional reporting by Fergal Smith in Toronto, writing by Kelsey Johnson and David Ljunggren in Ottawa)