The Spanish world number two, who said he was improving with each match, has yet to drop a single set in Melbourne and made no mistake in his fourth round clash, dispatching compatriot Feliciano Lopez 6-4, 6-4, 6-2 in stifling heat.
Elsewhere in men's round of 16 action Czech seventh seed Tomas Berdych was booed when he refused the traditional handshake after beating Nicolas Almagro in four sets.
Berdych accused his opponent of deliberately hitting a ball at him while he was positioned at the net during a rally.
Nadal reached the quarter-finals at the Australian Open for the sixth straight year and said he was in the "right place" to chase his second Melbourne title after beating Federer in the 2009 decider.
"I've started the tournament playing really well this time. I felt I've played well from the first match and today I played another complete match," Nadal said.
"Now I'm in the quarter-finals. I am doing the right things. I am in the right place, right moment."
Nadal broke left-handed Lopez's serve five times and dropped his service only once. He was always in control of the match, improving his record against his opponent to nine wins in 11 meetings.
"It was a very hot day and I think it's a positive to win in straight sets especially in these conditions," Nadal said.
Berdych beat 10th-seeded Almagro 4-6, 7-6 (7/5), 7-6 (7/3), 7-6 (7/2), earning just one break, but the contest ended in acrimonious fashion after he refused to shake Almagro's hand.
"It's what they (the crowd) think. When somebody wants to hit you straight to the face I don't see this as a nice moment," he told a courtside announcer.
"Especially when you have all the court free and you're just standing in the middle."
"That's their opinion. Nothing's going to change this because that's my decision and I don't have any nice feelings," he added.
"Of course I'm happy to go through in four sets, a really tough one, I'm looking forward to my next match."
Former US Open champion Juan Martin del Potro continued his resurgence with a convincing straight sets victory over unseeded German Philipp Kohlschreiber.
The Argentine 11th seed won 6-4, 6-2, 6-1 in just over two hours and will face either Swiss third seed Federer or Australian teenager Bernard Tomic in Tuesday's quarters, playing on Sunday evening.