This note about the song from roommate Kyle Hausmann:
Murder Ballads, the Nick Cave's collaborative album which includes "Henry Lee" done with PJ Harvey, was released in 1996, around the same time that the two artists - so says the vague Internet - had a brief but intense relationship. Some accounts claim this was an affair while Cave was with another woman; others do not reflect any infidelity. (It was perhaps Harvey's only relationship known to the public, and may not have been very secretive very long). By all accounts, Harvey ends the relationship, and Cave is devastated.
The the story the lyrics tell, the history of the two singers (whatever that history actually is), and the way the two touch and look at each other...