The 19-time Grand Slam winner, who is coming off an extraordinary 2017 in which he won two Grand Slams, will be up against a depleted field when the first Grand Slam of the year begins at Melbourne Park on Monday, with Andy Murray and Kei Nishikori out injured.
Long-time rivals Rafael Nadal and Novak Djokovic have also been struggling in the lead-up, potentially leaving the door open to one of the so-called "NextGen".
The volatile Kyrgios is among them and in good form, winning the lead-up Brisbane International last weekend, beating another young gun, Grigor Dimitrov, along the way.
"He's (Kyrgios) going through his things, whatever he needs to go through," the Swiss great told the Herald Sun newspaper Saturday. "But when he's on, he's on and he's really difficult to beat.
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"It seems like he's doing the right things otherwise he wouldn't be winning tournaments, especially not in Brisbane because being able to cope with the pressure at home is not a simple thing."
While the 22-year-old Australian crowd-puller, seeded 17, has exceptional talent, he has often undermined his abilities with petulant outbursts directed at the umpire or fans.
"Similar to my challenge, for him it's day to day and then week by week, can you keep it up?" he said.
"For me, it's because of me getting older. For him it's maybe in his mind and his body because he still needs to work much more than he currently is."
Federer added: "I think he's incredibly talented."
Kyrgios, who made the Australian Open quarter-finals in 2015, will begin his 2018 campaign against Brazil's Rogerio Dutra Silva.
The Swiss, seeded two, who starts his title defence against Aljaz Bedene, said he was feeling good and looking forward to the challenge.