Bluff has the rules for unbelievable lies, and also the GM is encouraged to alter DCs (or apply appropriate penalties/bonuses) to reflect strange or ridiculous circumstances. But keep in mind, the highest human bluff score in our world is like, +8*. And con artists can and have convinced people to leap off buildings, unlock doors they are guarding and hand the con artist the key and their gun, or betray their own family members, after they were told this was a famous con artist they were talking to. And most skilled con artists basically do not expect someone to be hard to manipulate, if not precisely in that extreme a circumstance.
So if Loki, god of lies and mischief, stabs an Umber Hulk and convinces it that actually it's someone over in that direction who stabbed them, so they go raging off in that direction busting through walls etc, while I don't particularly know how Loki achieved that, he was able to do that because he is very good at lying. Better than people in our world at lying, who are themselves using techniques they often struggle to describe and which most people who think they understand them (or claim to) are then unable to reproduce even slightly.
Lying is incredibly potent and powerful as a weapon, and most people are incredibly bad at it. So like most things PCs can do that their players can't (like cast Fireball), some handwaving is required to explain how they actually get from A to B (go on, cast fireball right now at the table to prove you know how your character does it - or it doesn't go off). Something like misdirecting an opponent as to who attacked them even if that person isn't present is the barest edge of what lies can accomplish and not impossible at all.
That said, if you asked whoever wrote that ability, they'd probably immediately clarify that they meant 'someone else adjacent' or 'someone else in the room'. They might even say they meant 'another enemy' of the creature targeted, and not say, an ally (getting accidentally stabbed by your allies in a confused melee is unfortunately quite common). It's very unlikely to be the intended use of this Rogue Talent, even though the text clearly makes it possible as written.
RAW - yes, that's how it works.
In-universe - lies are incredibly powerful. The GM may provide a penalty to your roll for an unbelievable lie, but provided you succeed, there is no reason this wouldn't work and I bet a skilled liar in our world could reproduce this while having less magical aids to his lying and less lies that work ('magical mind control' is less plausible in our setting).
RAI - the author likely did not think about that as an option and given pathfinder's relative level of power given to skills and rogues and fighters (as opposed to clerics, wizards and druids) would probably be shocked at the idea of rogues doing anything other than swinging daggers and picking locks.
* using human athletic world record holders as a baseline for maximum 'level' achievable in this setting.