* C$ breaches key level, hits lowest point since Sept 2004
* Canadian housing starts drop 12.3 percent
* Bonds eye flood of U.S. government debt this week
TORONTO, March 9 (Reuters) - The Canadian dollar fell to its lowest level versus the U.S. dollar since September 2004 on Monday morning after data showed a sharper than expected decline in new home construction in Canada.
The Canadian currency fell as low as C$1.3066 to the U.S. dollar, or 76.53 U.S. cents, shortly after a report said Canadian housing starts fell 12.3 percent in February to a seasonally adjusted annualized rate of 134,600 units from 153,500 in January. [ID:nN09444629]
While the weak housing data was a major catalyst driving the currency lower, the fall also came against a backdrop of a renewal of risk aversion in the market.
“It was a little bit a of delayed reaction to the housing starts,” said George Davis, chief FX technical analyst at RBC Capital Markets.
“It basically hit some stop/loss orders and had some momentum players buy dollar/Canada on the breakout.”
At 9:53 a.m. (1453 GMT), the Canadian currency was at C$1.3023 to the U.S. dollar, or 76.79 U.S. cents, down sharply from C$1.2865 to the U.S. dollar, or 77.73 U.S. cents, at Friday’s close.
A morning rise on the Toronto stock market helped keep a floor under the currency. The key Toronto stock index fell at the open but quickly rebounded on higher oil prices.
The Canadian dollar has been linked strongly to the movements on the Toronto stock market recently, partly as a reflection of risk appetite and partly due to their common relationship to commodity prices, especially oil, a key Canadian export.
Canadian bonds were a touch higher across the curve, tracking their U.S. counterparts as market players were preparing to absorb $63 billion in new U.S. supply this week in government notes and bonds.
The two-year bond was unchanged at C$103.07 to yield 0.955 percent. The 10-year bond rose 10 Canadian cents to C$107.20 to yield 2.926 percent.
The 30-year bond lost 25 Canadian cents to C$124.25 to yield 3.623 percent. (Reporting by Ka Yan Ng; Editing by Peter Galloway)