The fleet will be reviewed by Prince Harry, and tomorrow the celebration continues with a flyover by air force jet fighters, patrol aircraft and helicopters, and performances by 10 military bands, including the New Zealand Navy band.
Later, the harbour will explode with a huge 30-minute fireworks display launched from barges in the harbour, city rooftops and the decks of warships.
A lightshow from the harbour bridge, ships and on land will project the navy's history on to the sails of the Opera House, the bridge's pylons and the roof of the National Maritime Museum on Darling Harbour.
The show will include flyovers choreographed to specially composed music.
The State Government estimates the celebration will pump A$50 million ($56.5 million) into the New South Wales economy.
State Tourism Minister George Souris said the scale would rival the 2000 Olympics harbourside spectacular.
"This weekend is perhaps the mega-weekend of them all," he said. "The city and the state is in big welcome mode."