Did the squirrel understand what Varric was saying? It was difficult to tell whether the small animal froze and perked up their ears out of natural instinct or from worry that the crossbow would be used. Either way, the squirrel twitched its nose and turned to scurry away.
But Thor's reaction was just as quick, although probably not well thought out. Seeing how the squirrel was trying to run, Thor's instinct also kicked in, and he lunged forward (scattering the nuts he was holding all over the grass) and grabbed the critter with both hands.
In response, the squirrel started making a horrible screeching sound reserved only for when squirrels are terrified out of their minds. To Thor, it sounded like HELP HELP HELP! Eyes open wide and nervous, he tried to calm it by telling it, "Shush, shhhhhh! Don't scream, I'm not going to hurt you! I just want to talk to you!" but it didn't do any good... the squirrel kept screaming.