For what it's worth, here's the way I handle it. Arcane Sight allows you to see magic auras. Magic auras are not closely defined: they're effectively flavour text with no status-effecting condition associated with them. As a DM, I get to say how that's interpreted and I say that a "magic aura" as detected by Arcane Sight (where you explicitly "see" it, as opposed to Detect Magic, where you just "detect" it) is a sort of shimmery, coloured, wavery blur roughly corresponding to the size of the effect. The near-sighted analogy is a good one, although "really near-sighted and drunk as a lord" is more how I imagine it. Furthermore, I say that auras don't extend far from the object: certainly not far enough that someone making use of cover can't hide.
As such, Arcane Sight foils Invisibility to the extent that the caster can - as per the Detect Magic description - "pinpoint the location" of the invisible creature. However - as per the Blindsense description - pinpointing the location does NOT automatically negate concealment, in this case because you're basically just seeing an amorphous, irregular blob of swirly colour. So you might well use Arcane Sight and determine that there's an invisible man-sized blob in front of or behind you, but you can't make AoO's against it (because the aura's outline and movement don't particularly correspond to the creature) and it can still sneak-attack you because it still has total concealment.
This way, Arcane Sight doesn't trump See Invisibility. It's still useful, but it won't stop a Rogue from removing your kidneys.
If someone's hiding using cover that would stop Detect Magic - and such cover can include "hiding behind another creature or object that has a magical aura", then line of sight is blocked (although I would give a circumstance bonus to Spot checks made to detect the hiding creature). If someone's hiding in shadows or "in plain sight" and is radiating magic, the Spot check to notice them with Arcane Sight automatically succeeds.
I'm not claiming this answer is definitive, but it's consistent, relatively easy to adjudicate and has worked for the groups I've been playing with.