* C$ weakens on further evidence of slowing economy
* Canadian factory shipments fall 5.4 percent in January
* U.S. housing starts up 22.2 percent, more than expected
* Bonds steady, await outcome of two-day Fed meeting
TORONTO, March 17 (Reuters) - The Canadian dollar was lower against the U.S. currency on Tuesday morning on news that Canadian factory sales fell sharply in January.
Ahead of the data, the currency was at its weakest level of the session at C$1.2765 to the U.S. dollar, or 78.34 U.S. cents.
It popped to C$1.2729 to the U.S. dollar, or 78.56 U.S. cents, after a U.S. government report showed U.S. housing starts rose 22.2 percent, more than expected, in February. That decreased bids for the safe-haven U.S. currency and gave the Canadian dollar pause to inch higher. [ID:nCAT002557]
But further evidence of an eroding Canadian economy put pressure on the currency as data showed factory sales tumbled 5.4 percent in January from the previous month due to the meltdown in the auto industry. The number was slightly ahead of the 5.8 percent decline expected and followed an 8.2 percent drop in December. [ID:nN17446129]
"The manufacturing shipments certainly were weak, unequivocally," said Charmaine Buskas, senior economics strategist at TD Securities. "It does provide some confirmation that the manufacturing sector of the Canadian economy is indeed suffering, so I think we're seeing the Canadian dollar slip on that front."
At 9:35 a.m. (1435 GMT), the Canadian dollar was at C$1.2740 to the U.S. dollar, or 78.49 U.S. cents, down slightly from C$1.2735 to the U.S. dollar, or 78.52 U.S. cents, at Monday's close.
Other data showed labor productivity of Canadian businesses slid a sharper than expected 0.5 percent in the fourth quarter of 2008, leading to the first annual decline in productivity since 1996. [ID:nN17307691]
Canadian bond prices were steady as investors awaited the outcome of the two-day U.S. Federal Reserve policy meeting that began on Tuesday.
Bond prices are expected to be little changed ahead of the policy statement that is due on Wednesday. Market players are watching for what the Fed has to say about the possibility of a large-scale purchase of U.S. Treasuries to try to lower interest rates.
The two-year bond fell 2 Canadian cents to C$102.96 to yield 0.997 percent. The 10-year bond was unchanged at C$107.65 to yield 2.879 percent.
The 30-year bond edged up 5 Canadian cents to C$124.55 to yield 3.606 percent. The U.S. 30-year bond yielded 3.725 percent. (Reporting by Ka Yan Ng; Editing by Peter Galloway)