My best guess is that “gracia” here means something like “style” or “class”. You can’t dance La Bamba if you don’t have some style. “Tener gracia” in English could mean any of a lot of positive things…to be funny, classy, stylish, entertaining, fun to be around, hip, cool, attractive. I think that both the “witty” and “funny” definitions are wrong.
Translating colloquialisms is hard. The lyrics to “Macarena” (by the way, Macarena is a common female name in southern Spain, especially Sevilla) are, “Dale a tu cuerpo alegria, Macarena, dale a tu cuerpo alegria y cosas buenas”. Literally: “Give your body happiness and good things, Macarena.” The literal translation sounds faintly erotic. The real meaning is “Shake your booty, Macarena.” The song’s about a flamenco dancer.
By the way, I think it’s a little bit gracioso that I live in a district of Barcelona called…you guessed it…Gracia.