Is there a way to have content files use relative paths instead of absolute ones. In our environment it makes it difficult when we store the project files and content files in source control and create branches.

You can make it manually in files, but you can rise only on one level above the current directory (for example ..\folder1\folder2).

Document! X will automatically store files as relative paths in the .dxp and .dxc files, but as Vitally mentions it will only do this for files in the same directory path, or at most one parent branch away - this is by design to avoid huge ..\..\..\..\..\ relative references where the paths are clearly unrelated.