They use agency bonds as a means to create cash to pay for the derivatives to create the currency spread. There are many countries that will not allow non-citizens or entities to hold their currencies. The Yuan is one of them. So they have to create an artificial spread to participate. There are some commodity funds that use a similar technique.
I think this ETF is holds US dollar denominated money market instruments and then seeks exposure to the emerging market currencies in the index via swaps. I haven't purchased any yet, but I am quite intrigued with this idea.