I am sure in your SDK 1.7 based application you have the following setting in CSDEF:
<LocalResources>
<LocalStorage name="Microsoft.WindowsAzure.Plugins.Caching.FileStore" sizeInMB="1000" cleanOnRoleRecycle="false" />
</LocalResources>
Based on this error, I can see that you are updating the previous SDK 1.6 based deployment which does not have above setting and that why you are getting this error.
Because your configuration is changed update is failing. As a workaround to this problem, you can do a fresh new deployment to your Staging slot first and then SWAP VIP with production to have it updated.