For those unaware of Australia's odd constitutional arrangements, the head of state currently is English Queen Elizabeth II and through their shared history Australians maintain a strong connection to events in old Blighty.
That doesn't explain the whole stunt though. Due to massive party infighting ahead of the September general election, Julia Gillard is trying all manner of things to regain the initiative and garner lost popularity, amidst infighting with former also-ran Kevin Rudd. One such step was to announce a return to her traditional side by commencing a knitting of a soft toy for the English royal baby (while having only engaged in a sexist tirade at fellow male parliamentarians the week before). Quite daft really.
But there is a serious point here - the political sideshow is distracting from serious economic headwinds. As Warwick McKibben notes at MacroBusiness, problems lie ahead:
The biggest risk Australia faces is the political uncertainty which is undermining consumer and business confidence.
It won’t be until the end of 2013 that there is a clear indication of the direction of government policy. The good news is that the portfolio shift into Australian assets has probably passed, partly due to this political uncertainty. A weaker exchange rate is to be expected. This will be a two-edged sword. It will help with the profitability of trade-exposed companies but it will also add to imported goods inflation which will likely push inflation outside the RBA comfort zone.