Does the mobile documents, iCloud container need to be on the system disk?

I currently have a MacBook Pro with a 2 TB internal drive and a 2TB pcie drive in an enclosure Velcro’d to the back of the display.

I have about 700 GB of files in iCloud and I have turned off optimize on my Mac so that the files exist in both places.

I have about 700 GB of photos stored in iCloud and in PhotoLibrary the external Drive.

I recently purchased a M3 MacBook Air with only a 512 GB hard drive. I thought that I would only need to have a drive big enough to store the OS and applications and all of the other data would be stored on the 4TB external SSD.

My question is, can you have the iCloud container folder (mobile documents) exist on an external drive?

I think I remember hearing that you are even required to have a dropbox folder on the internal system drive?

If that is the case, is there anyway to create a Hard link to the external drive to trick the operating system into thinking that the system drive is bigger so that I can store the Cloud drive containers locally?

if Apple drives were reasonably priced users would not have to go through these gyrations.