* C$ at C$1.0205 vs US$, or 97.99 U.S. cents * Canadian factory sales rise 2.6 percent in Feb * U.S. new home starts up 7 percent in March * Bank of Canada seen keeping rates unchanged By Solarina Ho TORONTO, April 16 (Reuters) - The Canadian dollar was firmer against the greenback on Tuesday, recovering from its biggest one-day retreat in more than 16 months the previous session, buoyed in part by stronger-than-expected Canadian economic data. Canadian factory sales rose 2.6 percent in February from January, the largest gain since July 2011, helped by higher sales of transportation equipment, energy products and food. "You can't rule out the positive implications of manufacturing sales this morning, but I think a lot of the CAD strength this morning was already there," said Greg Moore, a currency strategist at TD Securities. "A lot of that comes from just retracement from yesterday's very strong moves." Pressured by plunging commodity prices, the currency had weakened by more than a cent on Monday, its biggest one-day loss against the U.S. dollar since December 2011. The Canadian dollar finished Tuesday's North American session at C$1.0205 against the U.S. dollar, or 97.99 U.S. cents, stronger than Monday's finish of C$1.0254, or 97.52 U.S. cents. South of the border, data showed groundbreakings for new homes rose 7 percent last month to a 1.04 million-unit annual rate, the highest level since 2008. Sal Guatieri, senior economist at BMO Capital Markets, said the U.S. housing data showed a recovery that is in full swing, though a drop in permits signaled a more subdued pace of home building over the next couple of months. "Suffice to say the U.S. housing market trend is clearly upwards and that's great for Canada's forest and lumber industry. So, overall, the two reports are positive for the Canadian dollar," Guatieri said. U.S. data on Tuesday also showed tame inflation, which analysts said supports the Fed's current quantitative easing policy. Separately, Canadian government data showed foreign investors cut their holdings of Canadian securities by C$6.3 billion ($6.2 billion) in February. The loonie, as it is colloquially known, underperformed most other major currencies except for the Japanese yen. It was trading at its weakest level against the Swiss franc in more than 13 months and hit its weakest level against sterling in two months. This week's key economic event will be the Bank of Canada's interest rate decision and monetary policy report on Wednesday. The bank is universally expected keep interest rates on hold and many also expect it to acknowledge the weakness seen in Canadian data during the first quarter. Canadian inflation data later in the week is also looming large in the market. The price of Canadian government debt was lower across the curve, with the two-year bond shedding 1 Canadian cent to yield 0.940 percent, and the benchmark 10-year bond falling 21 Canadian cents to yield 1.734 percent.