We have a subfolder that is a relative svn external (../project/subfolder). In a fresh trunk checkout it points to (...TRUNK/project/subfolder) and in a fresh branch checkout i
The correct answer to the question is "yes, it should update those externals." The fact that it does not is a bug:
see: http://subversion.tigris.org/issues/show_bug.cgi?id=3390
Fix target milestone is 1.6.10. The fix is apparently completed, but the current release version as I write this is still 1.6.6.