more tradable sectors, have a higher fraction of foreign-currency denominated liabilities (Bleakley and Cowan (2008)). If this mechanism is empirically relevant, the structure of trade should naturally shift towards industries producing goods that oer a natural hedge against exchange rate uctuations in countries with high exchange rate volatility, or as a result of sustained changes in exchange rate volatility such as those resulting from exchange rate liberalization. This is the hypothesis that is formally tested in this paper using data on the composition of exports of 129 countries across 749 commodities during 1984-2000, and the correlation of these commodities' global-unit-values and each of these countries' nominal exchange rates.

The idea that the price of some goods may be correlated with uctuations in the nominal exchange rate has been present in the recent literature on commodity currencies (Cashin et al. (2004), Chen and Rogo (2003)), which are currencies whose value uctuates with the average price of the commodities exported by the country. Typical examples of commodity currencies are New Zealand and Australia. Because of this correlation, the price in local currency of these commodities and of any other sector whose price is correlated with them will be stable relative to other products. Thus, if uctuations in the local currency price of goods matter for trade and resource allocation, rms in those sectors should become relatively more important after a sustained increase in exchange rate risk.

The importance of a commodity's natural hedge emphasized in this paper as a determinant of trade patterns may depend on the availability of other forms of hedging. For this reason, the paper controls for the availability of currency derivatives to assess the quantitative importance of the mechanism we emphasize. Moreover, in as much income uncertainty will impact nancially constrained rms the most, one would expect that un-hedged exchange rate uncertainty will have a larger eect in countries with underdeveloped nancial systems.

The results indicate that exchange rate volatility matters relatively more for those sectors that lack a natural hedge and are more exposed to it. The natural hedge against exchange rate volatility provided by a negative correlation between a commodity's international price and a country's nominal exchange rate aects its export patterns, even after controlling for other standard determinants of export composition, such as the factor content of trade and the export patterns of countries with similar income levels. An increase in exchange rate volatility from the 10th to the 90th percentile, corresponding to 57 percentage points, raises by 37 percent the ratio of the export share of a good at the 10th percentile of correlation (correlation of -0.55) relative to a good at the 90th percentile (positive correlation of 0.28). This dierence is about 15 percent of the typical within-country difference in export shares across commodities. Larger dierences in correlations are associated with proportionally larger changes in relative shares resulting from the same increase in exchange rate volatility. Without being a rst order determinant of the structure of trade, this mechanism can explain a non-trivial portion of the observed dierences in relative shares. Furthermore, instrumental variables specications controlling for endogeneity suggest that the actual coecient is likely one 2