Watt made his Gunners first-team debut earlier this season in a cup-tie and capped a great night by scoring in a 2-0 win over West Brom.
Grayson is delighted to have landed the winger and believes he will add much-needed competition to places in his squad.
"Sanchez is a good, young prospect who Arsenal think highly of," Grayson told the club's official website. "He can play either wide left or as a striker and he brings extra competition for places at an important stage of the season."
