"I suppose I just want to avoid dd feeling inferior as I do and I'm trying to establish the best way to do that."
And this is why you shouldn't just listen to the posters who tell you you are so right OP and that this is totally nauseating.
Because some of us have experience of exactly this situation and have made an effort to do something more constructive and have seen something grow out of it that was positive for both parts.
Basically, what you need to do is to help your dd to ignore her aunt and build a friendship with her cousin instead. They are the ones that are going to be around after the two of you are dead and they don't have to be affected by what goes on in the previous generation.
Let your dd know that "yes, of course auntie X is a bit annoying with always boasting about your cousin, but it doesn't really matter, it's just a silly thing that some adults do, you still like [whatever there is to like about the daughter], don't you, and you can still be friends".
Refuse to enter into a competition of talented children, just smile and look pretend-confident.
Never be less than kind to the daughter, though. Remember how little she is, imagine if it was your MIL doing this with your dd instead- would you want other adults to blame your dd? Make her feel loved by you, but for herself rather than for her amazing talents.
Build up your dd's confidence in other, quieter ways, let her know that you like the person she is, that you are proud of her, that the kind of competitive stuff she sees in her aunt is not relevant.
If you can carry this off, the day will come when it's not your daughter envying her cousin, it's the cousin envying your daughter for having such a sensible mum.