The diff is comparing what's in your working folder to something else, so at least one has to be on disk in a working folder if used in Vault. For a different folder in Vault you would select 'Any Repository Folder/File'.
If you don't have either of them on disk, you should be able to do a history query on on folder, and from there do the diff to the other repository folder. This would download all the files to temp directories and run the diff on those folders.