I'd like to suggest you use Remote Desktop to connect Azure VM and see that XML file is existing. As far as i know, azure package is deployed it's not creating the /App_Data/ folder, you can check for this.
And i dont think this is a good way to put xml file in app root directory:
1, security reason. it's not a good practice that the worker account has write access to the app directory.
2, recycling reson. when a certain amount of files (or directories) change or get created, IIS might decide to recycle the app domain.