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Multiple reports on mailing list e.g. http://cygwin.com/ml/cygwin-xfree/2009-06/msg00012.html postinstall script sets the working directory in the shortcut to be empty (so it ends up being the user profile directory or something), allowing the default of the directory containing the target should work better in these situations
Created an attachment (id=4005) Patch to xinit postinstall script
Thanks for the patch; I'll roll xinit-1.1.1-3 and push it together with xserver-1.6 and company.
Shipped in xinit-1.1.1-3 for Cygwin 1.7.