How to talk to DD about transgender cousin?

It's always bloody challenging putting a child into a situation where there's an expectation that they'll protect the feelings of a narcissistic adult. And any adult that expects a child to pretend they are the opposite sex, or go along with the idea that male and female are about your feelings and clothes, is placing adult narcissism over a child's wellbeing.
Not to mention the awful message it sends a child about how horrific and hateful their own sex apparently is, that someone should want to escape it so badly. Exact opposite of body positivity.
Children want to please adults. There's no way for a child to appease an adult who believes themselves to be trans that doesn't have some negative impact upon the child.

Not helpful to you, OP, sorry.
I'd just have lots of conversations beforehand about being kind as much as is possible, but not beyond the point where you're being asked to pretend you believe or say something that isn't true. If an adult is making you uncomfortable, something is wrong.

Have you talked to her about gender identity things generally? I have a bit (they're 7 and 9) as I want them to be aware before it comes up in school. We treat it like religions really. Some people believe... but I think ... because ...

Could you just say cousin x is female really but believes they're a boy and has taken medicine to make themselves look more like a boy. Ask her not to mention it or call x her as it might upset them. Tbh the amount of interaction of 8 year old with adult cousin is likely to be pretty low anyway isn't it? I don't usually pronoun family members much in their presence anyway, either I'm talking to them or not, I'm not talking about them. But pre warning her might help her to not do any double takes or ask awkward questions that might offend.

Humans can't change sex but they have the right to live in whatever gender stereotype that that choose (as long as this doesn't conflict with the rights of others). Gender incongruence is a hard thing to live with, i wouldn't wish it on anyone. Studies have shown that for many young people it won't be forever.

Their cousin will probably appreciate a friend, just to do normal teenage stuff with.

I think I'd tell her the simple facts about not being able to change sex, but some people feel like they need to be referred to as the opposite sex, for reasons that are personal to them. Has the cousin had a name change? I'm assuming so. You could discuss that people can change their names as adults, and to try to remember to use the new name but not to worry if she forgets and uses the old one by mistake. Also that other people might use he/him to refer to the cousin, and they are doing so because the cousin has asked them to.

I'd just say cousin X is a woman but prefers to dress and live like a man

Do your kids know that humans cannot actually change sex? That would be the first thing I'd tell them, and then ask them to be polite to their cousin, who is so unhappy about being a girl they want to be a boy. Reiterate that bullying is not ok and trust them to do the decent thing.

Have the conversation and at least that should give you some idea of how they will react and how much guidance they need.