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The two London clubs are expecting a bumper crowd at Wembley in the showpiece finale to an SSE Women's FA Cup competition that has left just the two fierce rivals standing.
Smith, who was awarded an MBE in the 2008 Birthday Honours, started that 2016 final as Arsenal came out on top with a 1-0 win despite going into the match as underdogs.
With Chelsea currently leading the FA Women's Super League standings and Arsenal down in fourth many people have the Gunners as underdogs again, with Smith expecting a similarly intense encounter.
"They're both coming off losses," she said. "Arsenal lost to Birmingham in the league and Chelsea lost to Wolfsburg in the Champions League so they're going to be upset.
"Any time as a player you have a defeat you want to win the next game and both teams are going to have the bit between their teeth on a fantastic occasion.
"Both teams have been to Wembley in recent years and I think it'll be a grudge match.
"Both teams hate each other on the pitch, maybe they're friends off the pitch but once you're into the game you're representing that badge and it'll be entertaining for sure."
Chelsea may have the higher league position but Arsenal are most definitely a resurgent team, who have recovered from a stuttering start under former boss Pedro Martínez Losa to find strong form under Joe Montemurro.
Since Montemurro's appointment as manager just eight goals have been conceded in 12 league games, with Smith acknowledging defence will have to be tight again on Saturday.
"Both teams have good attacking players," she said. "Fran Kirby's in really good form at the minute, over 20 goals this year, but then Arsenal are very good defensively.
"You have to be tight to them as soon as they get the ball, don't let them get their head up, be aggressive in your play.
"Maybe even foul them a couple of times early on just so they know they're in for a battle!
"Arsenal have talent too, with Danielle van de Donk, Jordan Nobbs and Vivianne Miedema.
"They've got goalscorers all over and I think there will be goals in it on Saturday, there has to be, they want to win the trophy."
Smith was speaking from Ravenscourt Park Preparatory School where her and fellow Arsenal great Faye White gave a talk and put on a training session for pupils, accompanied by the SSE Women's FA Cup trophy.
"Me and Faye have obviously retired now but we still do a few bits to make sure young girls are inspired and to act as the role models they need.
"There's 18 girls training with us and they're smiling, they're engaging and they're having fun.
"That wouldn't have happened years ago, so to see this turnout and the way things are going, more girls are getting involved and it's fantastic."
Tickets are now on sale for the SSE Women's FA Cup Final on Saturday 5th May at Wembley Stadium connected by EE. For more information about tickets and SSE's involvement in women's football visit https://sponsorship.sse.com/
by Richard Dore, Sportsbeat
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