Cloudwatch collects data from the host OS, where your VMs are actually running.
If the physical server had a significant issue both cloudwatch and your VM would go down but in that case the VM would get started automatically on another physical server. In such a case, recovery would be usually quite quickly.
You don't need to check Cloudwatch at all because AWS handles that but you could add alerts for things such as CPU usage on your VMs.
Because Cloudwatch doesn't run on your machines it can't know some things such as memory usage, disk space usage or others so if you need more advanced monitoring capabilities you might consider running something like collectd inside your virtual machine.