The objection claims that any two existents must either touch or occupy separate directions. Since God is neither a body residing within the world nor a bodily container for it, the objector concludes that God must occupy a direction outside it.
أن ذلك وهم محض، وحكم على غير المحسوس بأحكام المحسوس
This is mere imagination: applying the rules of sensibles to what is not sensible.
The unproved premise is that every existent must stand in spatial relations. Without that premise, touching and spatial separation are not an exhaustive division of existence. The reply exposes the unjustified transfer of rules about bodies to the non-corporeal.