Watkins was the first female member of the band and will step down at the end of the year, to spend more time with her family and focus on studying.
She will be replaced by 15-year-old Tsehay Hawkins, who was one of the four new members announced earlier this year.
Watkins said that the COVID-19 pandemic, couples with the Wiggles touring scheduled, meant she missed being home with her family.
"Like many people around the world, the pandemic has given me time to reflect on what is important in life," Watkins said.
"For me, that means spending more time at home, something that I didn't realise I was missing out on being away eight months of the year on tour.
"I'm really looking forward to devoting more time and energy to focus on completing my PhD which incorporates my ongoing passion for sign language, dance and film editing, and to having more time to work with the deaf community."
Watkinson joined the Wiggles in 2010 and became the third Yellow Wiggle in 2013.