Australian Dollar retreats as rising US yields overshadow upbeat Chinese PMI

• The Australian Dollar falls 0.29% on Tuesday despite stronger-than-expected Chinese manufacturing activity in August.
• Australian Building Permits decline 3.6% in July, a smaller contraction than markets had anticipated.
• Rising US Treasury yields support the US Dollar ahead of US manufacturing and employment data.

AUD/USD declines 0.29% on Tuesday, trading around 0.7145 at the time of writing. The Australian Dollar (AUD) struggles to retain the momentum initially generated by encouraging Chinese economic data, while the US Dollar (USD) benefits from rising US Treasury yields.

Manufacturing activity in China, Australia's largest trading partner, shows signs of improvement. China's RatingDog Manufacturing Purchasing Managers Index (PMI) rises to 51.5 in August from 50.9 in July, beating market expectations of 50.9. A reading above 50 indicates an expansion in activity, which is generally supportive of the Australian Dollar given the close trade relationship between the two economies.

Domestic data also provide a slightly better-than-expected signal. Australian Building Permits fall 3.6% MoM in July, compared with an expected 4.8% decline and following a 7.2% increase previously. On an annual basis, total dwelling units approved rise 9%, up from 8.9% previously.

These developments, however, are not enough to keep AUD/USD in positive territory. The US Dollar finds renewed support as US Treasury yields rise amid higher Oil prices and renewed geopolitical tensions in the Middle East. The benchmark 10-year US Treasury yield reaches 4.78%, approaching the recent high of 4.81%.

Against this backdrop, the US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, trades around 99.60 on Tuesday. Higher US yields increase the relative appeal of the US Dollar and contribute to limiting the Australian Dollar's upside potential.

Investors now turn their attention to fresh US economic data. The Institute for Supply Management (ISM) Manufacturing PMI for August and the Job Openings and Labor Turnover Survey (JOLTS) for July are due on Tuesday at 14:00 GMT. These releases could provide fresh clues about the trajectory of the US economy and the monetary policy outlook of the Federal Reserve (Fed).

In Australia, investors await second-quarter Gross Domestic Product (GDP) data on Wednesday. The release will provide further insight into the Australian economy's growth momentum and could influence expectations surrounding the Reserve Bank of Australia's (RBA) next policy decisions.